Wednesday 23rd September 2015
Today the much anticipated speech by the European Central Bank (ECB) president Mario Draghi has caused the Euro to gain strength, and this has pushed Pound/Euro rates down to around €1.36 which you can see from the chart below:
What did Drahi say that caused the Pound/Euro rate to drop?
In recent days there was speculation that the ECB may either increase their Quantitative Easing programme, or announce a cut in interest rates in order to combat a potential slowing of the Eurozone economy. The market had been partially pricing this into the value of the Euro over the last few days, which is why the Pound/Euro rate had recently hit nearly €1.39.
For me there was one key part of his speech that caused the Euro to strengthen, pushing exchange rates lower:
“I am aware that many of you closely scrutinise the potential effect of the low interest rate environment on financial stability; ... let me underline that we are closely monitoring risks to financial stability, but we do not see them materialising for the moment. Should this be the case, macroprudential policy – not monetary policy – would be the tool of choice to address these risks.”
What on earth does this mean, I hear you ask?!
In simple terms, he’s saying that he knows everyone was hanging on his words to do with interest rates, but actually if the economy suffers they wouldn’t use interest rates (monetary policy) to maintain financial stability, but rather macroprudential policy (Regulating things like how much you can borrow on mortgages) instead. So in effect he’s saying that there is no chance of an interest rate cut.
As such the Euro has gained strength and become more expensive to purchase, as I said would be the case in yesterday’s post should there be a lack of any mention of further QE or a rate cut.
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