Euro (EUR) Exchange Rate Outlook weakens on Draghi Comments

September 22, 2016 - Written by Frank Davies

STORY LINK Euro (EUR) Exchange Rate Outlook weakens on Draghi Comments

Euro Pound (EUR GBP) Euro US Dollar (EUR USD) Exchange Rates Trending Lower

Both the Euro Pound (EUR GBP) and Euro US Dollar (EUR USD) exchange rates recorded losses following a speech delivered by ECB President Mario Draghi.

Comments issued by the Head of the European Central Bank had an instant impact on Euro (EUR) exchange rates, with the common currency posting almost instant losses against the other sixteen most actively traded global currencies. The Italian moneyman issues a stark warning regarding a shift in emphasis of the euroland banking sector, paying particular attention to proxy banks, (sometimes referred to as ‘shadow banks’). Draghi noted that,

‘As financial intermediation continues to shift from banks to non-banks, we need to adapt our policy framework,’ before expanding by warning that, ‘we need to identify migrating risks and develop tools to mitigate them.’

Pound Euro (GBP EUR) Exchange Rate Recovers From Week's Worst Levels

Draghi went on to suggest that the euro area’s banking sector was bloated and that this was the fundamental driver behind the lack of profitability in the sector which has led some analysts to warn of a potential collapse in both the Italian and Portuguese retail banking sector. Draghi stated that,

‘Overcapacity in some national banking sectors, and the ensuing intensity of competition, exacerbates this squeeze on margins. Such over-capacity also means the sector does not operate at the efficient frontier, which is one reason why cost-to-income ratios remain high in some countries.’

Talk of troubles ahead for the euroland’s banks hit the euro, sending the Pound Sterling euro exchange rate from yesterday’s lows in the 1.1500s up to an intraday high of 1.1663 GBP EUR a short time ago.

GBP USD Exchange Rate Forecast Remains Neutral-Negative

Elsewhere, the US Federal Reserve opted not to hike its headline interest rate yesterday evening and support for the US Dollar (currency : USD) wane on the session. The report which accompanied the Fed decision observed that,
‘The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.’

This, in combination with the news that three Fed rate-setters had voted for an increase yesterday, means that the forecast for the GBP USD exchange rate remains NEUTRAL TO NEGATIVE.

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TAGS: Currency Predictions Euro Forecasts Pound Sterling Forecasts