Forecasting Renewed Gains for Pound to Euro Exchange Rate Before 2016

March 25, 2015 - Written by John Cameron

STORY LINK Forecasting Renewed Gains for Pound to Euro Exchange Rate Before 2016

Comments from policysetters at some of the world’s leading central banks stole the headlines during today’s session in the global currency markets, but the major units have apparently been slow to factor them in.

The European Central Bank’s executive member Peter Praet led the way earlier today with words which were mildly reassuring and at the same time mildly concerning for investors holding the single currency. Praet stated publicly that, ‘most Greek banks are still normal ECB counterparties,’ suggesting that most retail banks in the debt-addled Hellenic state were not facing any liquidity problems. The statement was reminiscent of the infamous 1980s Russian newspaper advertising campaign for the Soviet state airline which advised readers that, ‘more often than not, Aeroflot planes land safely’. The question for euro-holders is ‘what about the proportion of banks which are not financially secure?’ If a Greek meltdown does take place, then it would appear likely that this will be led by a dozen or so domestic retail banks, so Praet’s words re-enforced the impression that a Greek disaster remains a live possibility.

Elsewhere, German Government Spokeswoman Christiane Wirtz added to the uneasy feeling that all is not well in Athens when she observed that the eurogroup need to ‘move quickly’ on the Greek aid programme which it continues to negotiate.

Meanwhile, on the other side of La Manche, the Bank of England’s policymaker Kristin Forbes offered a ray of hope to holders of the Pound Sterling (currency:GBP), when she stated that it remains unlikely that the Bank of England will opt to further loosen its already ultra-loose monetary policy by cutting interest rates or increasing the £375bn already allocated to its Quantitative Easing programme. Forbes’ assertion that the recent dramatic drop in UK inflation, as gauged by the Consumer Price Index, has been attributable to the attendant fall in global oil prices and strengthening Pound, backed up her summary of the situation – there is no point in attempting to manipulate domestic demand if the drivers of domestic inflation are exogenous.

Tying it all together, Greece remains a real and present threat to the euro into the medium term and the markets may well be over-estimating the potential for a Bank of England interest rate cut. For this reason, analysts still forecast that the Pound Sterling euro exchange rate will move higher again during coming months.

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