Although European Central Bank (ECB) easing is usually supportive of demand for the Danish Krone, speculation of long-term negative rates has limited the appeal of the Danish currency.
DKK Exchange Rates Decline on Rohde Comments
Thursday was a significant day for the markets after European Central Bank (ECB) policymakers surprised by not only cutting all rates, including the deposit rate to -0.4%, but also expanding quantitative easing to €80 billion.
On the same day, although not nearly as globally impactful as the ECB’s decision, Denmark’s central bank opted to leave rates on hold at -0.65%. This reduced the interest rate spread which would have ordinarily caused the Krone to strengthen.
However, President Mario Draghi’s comments that he does not expect the ECB to cut rates further caused the Euro to rally which reduced the appeal of the Krone. What’s more, Denmark’s central bank Governor Lars Rohde stated last month that markets may be right in the expectation that the interest rate will be below zero until as late as 2019.
Negative interest rates have been one of the buzz subjects amongst economists in 2016. Since the Bank of Japan (BOJ) opted to adopt the controversial policy tool negative sentiment towards negative rates has increased dramatically.
GBP Gains on Euro Depreciation
Although the Euro made notable gains on Thursday following Draghi’s comments, Friday has seen traders turn attention back to the aggressive measures employed by the central bank. The greater-than-anticipated asset purchase program has had a particularly detrimental impact on the EUR value as is the purpose of using quantitative easing as an economic stimulus tool.
As a result the British Pound enjoyed a boost during Friday’s European session. This is despite a report from the British Chambers of Commerce (BCC) which stated that they reduced forecasts for UK economic growth in the face of mounting external risks.
Next week the main focus for those trading with the Pound Sterling will be the budget speech from Chancellor George Osbourne. The Bank of England (BoE) Monetary Policy Committee (MPC) will also convene to decide on policy outlook. This is thought to be muted in terms of impact on Sterling volatility, however, given that very few expect any changes to BoE policy at this time.
GBP/DKK Exchange Rate Forecast to Gain
The outlook for the British Pound is comparatively positive thanks to Euro weakness and the potential for more lucrative trade. Even political developments regarding the EU referendum are having far less of an impact. With that said, however, if Osbourne gives a dovish budget speech the Pound may resume depreciation.
Conversely, the outlook for the Krone is negative. Damp sentiment with regards to negative interest rates is likely to have a prolonged detrimental impact on DKK demand. It is fair to say, however, that the Krone may find near-term support in reaction to the Euro’s depreciation.
Over the past seven days, the Pound Sterling to Danish Krone (GBP/DKK) exchange rate was trending within the range of 9.5091 to 9.7375.