The Pound to Euro exchange rate began this week’s session at very similar levels to where it was seven days ago. This is despite bold moves from the European Central Bank to loosen monetary policy.
Queen & Carney Embroiled in ‘Brexit’ Debate
‘Brexit’ concerns dominated UK economic sentiment last week as Bank of England Governor Mark Carney was criticised for highlighting the risks posed by a vote to leave the European Union while The Sun was given a good telling off by Buckingham Palace for suggesting that the Queen was keen on taking Britain out of the 28-nation bloc.
The main event for GBP/EUR, however, was Thursday’s mega statement from ECB Chief Mario Draghi. Far and away exceeding market forecasts for a -10 basis point cut to the deposit rate, Draghi made waves by announcing three separate rate cuts and a €20 billion boost to the bank’s QE target.
The extremely dovish stimulus package saw the benchmark rate cut from 0.05% to zero, the deposit rate cut from -0.30% to -0.40% and the overnight rate slashed from -0.25% to -0.30%. The monthly asset purchasing target was raised from €60 billion to €80 billion.
The Euro initially tumbled by around a cent against Sterling in reaction to the ultra loose policy decision. However, the single currency quickly rebounded by almost three cents as Draghi admitted that the central bank had reached its limit on effectively reducing interest rates. The remark was seen as a signal that the ECB was no longer directly targeting the Euro exchange rate as part of its stimulus measures and this drove GBP/EUR within a cent of a 15-month low.
During Friday’s session the Pound to Euro exchange rate ticked back up through resistance levels as investors fully digested the implications of the shift in stimulus.
The unexpected rate cuts and additional QE funds will undoubtedly have a sizable impact on the Eurozone economy as lending increases and investment yields soften, and the single currency came under pressure as a result.
A New Euro Outlook
Another interesting outcome from the stimulus measures is the implications for a ‘channel rebalancing effect’ to kick in.
With credit risk now reduced in the Eurozone – the ECB is trying to incentivise lending to the real economy to such an extent that some banks may be paid by the ECB to give out loans – foreign investors are likely to pile into Euro-denominated assets. But to insure against swings in the single currency that could accompany gains in their investments, most traders are now taking out positions against the Euro.
This trend of shorting the single currency could prove damaging to the Euro over the next few months.
BoE & Budget Could Weigh on Sterling
The main events to look out for this week are the UK labour report due on Wednesday, the Chancellor’s budget (also due on Wednesday) and the BoE’s policy announcement due on Thursday.
The budget is likely to see Chancellor George Osborne rein in spending to make up for another year of missed budget targets. This is liable to reduce growth prospects and pressurise Sterling.
The BoE announcement could well take its toll on the Pound if it features hints towards the possibility of lower interest rates. A potential ‘Brexit’ is likely to feature as a key concern for policymakers.
Overall, the outlook for GBP/EUR this week is mixed as both currencies have fairly significant bearish concerns to contend with.
Heads Up
Summary of major upcoming data releases that we think may move the market.