Foreign Exchange Report : GBP EUR Rate Spirals as ECB Cuts Eurozone Growth Forecasts and Trichet Hints at Loosening Monetary Policy

September 9, 2011 - Written by John Cameron

STORY LINK Foreign Exchange Report : GBP EUR Rate Spirals as ECB Cuts Eurozone Growth Forecasts and Trichet Hints at Loosening Monetary Policy

The Pound Euro exchange rate (GBP EUR) is 1.1491. The Pound Dollar exchange rate (GBP USD) is 1.5972. The Pound Australian Dollar exchange rate (GBP AUD) is 1.5060.

It is almost eight years since Jean-Claude Trichet took over from Wim Duisenberg as the President of the European Central Bank. In this time, Trichet has carefully cultivated a reputation as a hard-liner on monetary policy, consistently calling for ’vigilance’ against the threat of Eurozone price increases and regularly reminding listeners of the potential social divisions and economic difficulties that inflation could cause in the fledgling Eurozone.

So, it came as a major shock to the markets when Trichet abandoned his usual hawkish rhetoric at yesterday’s post-ECB rate announcement press conference. Trichet used the event to describe, ‘the medium-term outlook for price developments as being broadly balanced’, meaning that he does not view the reigning in of Eurozone inflation as being a priority. Trichet also noted that there was, ‘particularly high uncertainty and intensified downside risks’, in the Eurozone economy currently.

Trichet went on to reiterate the ECB’s willingness to provide liquidity for Europe’s beleaguered banking sector describing Eurozone policy-makers as being ‘very keen’ on using ‘non-standard measures to provide liquidity’.

The suggestion that the ECB may be set to further loosen monetary policy in the near-term in order to counter the spread of sovereign debt contagion saw the Euro come under heavy selling pressure during yesterday afternoon’s European session.

The downside move for the Euro was added to when the ECB acted to cut their Eurozone growth estimates for the remainder of this year from 1.7% to 1.6%. The ECB also announced that they expect growth to slow to 1.3% across the Eurozone next year - their previous estimate had been that Europe’s economy would expand by 1.9%.

Yesterday’s events in Europe have lead many analysts to conclude that the ECB is now actively considering a cut in their key lending rate. These market whispers saw the GBP EUR rate climb to briefly break 1.1500 for the first time since 19th August. The Euro suffered similar losses against the US Dollar, causing the EUR USD rate to drop down through 1.3900. With the Organisation for Economic Co-ordination and Development yesterday issuing a report estimating that German economic activity will contract by as much as 1.6% in the final quarter of 2011, further downside is possible for Europe’s single currency during today’s session.


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