Wednesday, 28 June 2017

Sterling/Euro rates volatile

It's been an interest 24 hours for GBP/EUR rates as the graph below illustrates:


As you can see, rates slipped from €1.14 to as low as €1.1260 earlier today, only for it to shoot back up to €1.14 again.

Why has the GBP/EUR rate been so volatile?


The reason it shot back up is the same reason it dropped in the first place; comments from Central Bank chiefs. Yesterday the ECB hinted that they would be scaling back their stimulus measures, as outlined in my post yesterday. This caused the Euro to continue gaining strength this morning. Then in a statement today, they said that markets had got it wrong and actually, further stimulus would be needed. I thought it contradictory and rather odd, but it's probably the case that they didn't want the Euro to strengthen too much, and I think that's why they corrected themselves today. Given how the EU economy is faring, it is likely that they will reign in their stimulus measures later this year, so the Euro will probably strengthen in the coming months again, sending GBP/EUR back down.

The BoE governor Mark Carney was also in a contradictory mood. Only last week he said that now is not the time to raise interest rates, sending the Pound lower. Then the BoE chief economist said that he thinks rates should start rising, sending the Pound higher. Today, the deputy BoE chief said that now is not the time to raise the rate, and then just a few hours later, Mark Carney came out and said that actually raising interest rates later this year is something that might happen after all. Clear as mud!

Will Pound/Euro go up or down?


You can see how the markets react to comments from influential people at the BoE, and it will be interesting to see how the 8 members vote on the 13th of July. Personally I believe rates will rise to 0.5% later this year, but probably not until after the summer.

Regarding the GBP/EUR rate, after a choppy 24 hours we're back to where we were at around the €1.14 level that it has been stuck at for a while. Due to a resurgent Euro and ongoing concerns over Brexit negotiations, I think that it's unlikely the Pound will gain. With a rate hike some way off and the Euro getting stronger, a move lower is more likely.

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