Rumours Of More QE And AAA Debt Downgrade Send Pound Euro Exchange Rate (GBP EUR) Sharply Lower

Published: Wednesday, 6 February 2013 09:00 BST - Written by John Cameron

STORY LINK Rumours Of More QE And AAA Debt Downgrade Send Pound Euro Exchange Rate (GBP EUR) Sharply Lower

The hullaballoo of yesterday’s session brought extreme price action for several of the world’s leading currency pairs, as investors left behind any semblance of logic and traded on pure gut instinct. The Pound registered pronounced gains against the euro before the European session even got underway, sending the Sterling to Euro exchange rate (currency : GBP EUR) all the way up to 1.1687.

However, the gains for GBP EUR were already being pared when the latest UK PMI Services sector survey came out at 0930hrs GMT. Perversely, even though the gauge of Britain’s services sector thrashed expectations, GBP EUR continued to fall.

Ordinarily, analysts would have anticipated that the downward momentum for GBP EUR would be arrested by significantly weaker than expected whole of eurozone Retail Sales data for the key month of December, released at 1000hrs GMT, which revealed a year-on-year drop of some 3.4% in the level of shop sales across the euro area. Once again, price action for GBP EUR defied logic by continuing to tumble in the wake of this ostensibly euro-negative release.

The move lower for GBP EUR really got going once the volume came into the market when New York opened, sending the pair all the way down into the lower reaches of the 1.1500s – more than 1.5c below where it had traded at the start of the working day.

The sharp move lower for GBP EUR hints at the fragile state of investors’ confidence in the UK tender. The market’s reaction to a positive set of British services sector data was particularly instructive – in the words of the old market adage, ‘what should go up and doesn’t go up can only come down’, and that certainly appeared to be the case yesterday afternoon. More than any individual data release, market sentiment towards the Pound currently appears to be driven by bigger issues – in particular QE and the potential loss of Britain’s credit rating. We shall learn more about the former tomorrow when the bank of England makes its latest policy announcement.

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