Pound Euro ALERT: Spread of Outcomes Forecast for GBP EUR Exchange Rate if ECB Goes for All-Out QE

January 20, 2015 - Written by John Cameron

STORY LINK Pound Euro ALERT: Spread of Outcomes Forecast for GBP EUR Exchange Rate if ECB Goes for All-Out QE

If you believe the financial press, then the announcement of an all-out Quantitative Easing programme for the eurozone from the European Central Bank (ECB) on Thursday is a done deal. It isn’t. With ideological and practical objections from one of the euroland’s major players, anything is possible from the euro areas reserve bank. As with all hotly anticipated policy decisions, the ECB’s announcement in just over 48hrs has a range of possible outcomes.

Our leading analyst looks at the potential fall-out from the ECB decision below and sets out his forecasts for the possible effect of each potential outcome.

1.) The ECB decides against broadening the remit of its existing asset purchase scheme for now.

With investors almost universally pricing-in sovereign debt purchases from the euroland central bank in the short term, such a decision would be strongly EURO POSITIVE. The realistic potential for such an outcome remains – the ECB policy meeting has not taken place yet and senior German policymakers remain staunchly against all-out QE.

If the ECB does go down this route, then expect, then analysts forecast that GBP EUR exchange rate will track back into the low to middle part of the 1.2000 – 1.3000 trading range.

2.) The ECB opts for full-tilt QE, but commits less than the anticipated €500bn to the scheme.

It’s all a matter of degree with these big decisions. A commitment of perhaps €400bn by the ECB to a QE programme would bring a limited amount of support for the single currency; analysts forecast that the GBP EUR exchange rate would settle back below the 1.3000 threshold.

In such a circumstance, a key level for GBP EUR would come at its previous and long-standing peak of 1.2894.

3.) The ECB goes for all-out QE and announces that the programme will consist of over €500bn.

Such a result would be likely to see GBP EUR steadily grind higher as the euroland central bank gradually switched government T-bills for cash.

Analysts forecast that the psychologically-key 1.5000 threshold, where the pair consistently encountered technical resistance during the 2004 – mid-2007 period, would represent the ultimate target for the pair in such a circumstance.

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