Thursday, 21 January 2016

Pound/Euro rates recover slightly, but will it last?

There has been a slight recovery in GBP/EUR rates today due to comments by the European Central Bank (ECB) president Mario Draghi. As you can see from the chart below, it was normal service all morning with GBP/EUR steadily dropping to lows of €1.2920. You can see the sharp spike upwards at 13:30pm to €1.3082:


The spike will be welcome for any Euro buyers, but in real terms the rate is only back to where it was yesterday.

What caused the Pound/Euro to rise, and will it continue?


At 12:45pm the ECB announced its decision to keep interest rates at their low of 0.05%. This was as expected, as very low inflation in the EU means it will be a very long time before rates rise. At 13:30pm Draghi gave a press conference, and it was what he said here that caused the Euro to weaken, pushing GBP/EUR higher.

He stated that downside risks have increased due to global uncertainty, citing commodity markets and geopolitical risks in particular. He said that due to lower oil prices, inflation is likely to drop further, meaning that interest rates will remain lower for an extended period, and rates could even be dropped further. There is also speculation that they will extend their QE stimulus programme.

All of this caused the Euro to weaken and become cheaper to buy as investors sold the single currency, and that's the reason we saw the GBP/EUR rate climb from €1.29 to nearly €1.31. You can clearly see the instant reaction to his comments in the graph above. The rate has already started to dip back away however, and as I stated above while the spike is welcome for Euro buyers, it's only recovered the losses we've seen over the last 24 hours. I expect the downward trend to continue and rates to drop back below €1.30 again in the coming days. Those that need to buy Euros may wish to consider locking in a rate sooner rather than later, if they are worried the rate will keep dropping.

What could move the exchange rate in the coming days?


From the EU we have a few things tomorrow that could affect things. ECB president Draghi gives another speech tomorrow morning, and as we've seen today his comments often move the GBP/EUR exchange rate. There are also some manufacturing and services numbers from Europe. In the UK, we see Retail Sales data and the latest Public Sector borrowing figures. If poor, these could weaken the Pound further.

Next week is mostly comprised of economic figures from the USA, however we do have UK consumer confidence figures on Tuesday, and the latest Gross Domestic Product (GDP) numbers from the UK on Thursday. In Europe,  inflation numbers on Friday could cause a spike in GBP/EUR if they are close to 0%.

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