Foreign Exchange Insight : GBP EUR Rate Hangs in the Balance as Investors Nervously Await the Outcome of this Afternoon?s Bank of England and ECB Monetary Policy Decisions

October 6, 2011 - Written by John Cameron

STORY LINK Foreign Exchange Insight : GBP EUR Rate Hangs in the Balance as Investors Nervously Await the Outcome of this Afternoon?s Bank of England and ECB Monetary Policy Decisions

The Pound Euro exchange rate (GBP EUR) is 1.1562. The Pound Dollar exchange rate (GBP USD) is 1.5411. The Pound Australian Dollar exchange rate (GBP AUD) is 1.5974.

The headlines in the currency markets today are likely to come from this afternoon’s two key central bank monetary policy decisions.

The Bank of England announces its policy decision for October at mid-day UK time. It is highly unlikely that the nine-man committee will opt to change interest rates from their current record low of 0.50%, however there is a distinct possibility that they may decide to increase the current £200bn worth of funds ear-marked for the Bank’s quantitative easing scheme.

It is a near-certainty that MPC member Adam Posen will once again vote for an increase to the UK's QE scheme and it appears a distinct possibility that the committee’s newest member, Ben Broadbent, will join him. Broadbent dropped heavy hints that he is considering this course of action during an interview he gave a couple of weeks ago. If three other members of the nine-man committee were to join Posen and Broadbent in voting for a re-ignition of the UK’s QE scheme, then Sterling would be sure to come under heavy selling pressure.

The European Central Bank’s policy decision follows hot on the heels of the Bank of England’s at 1245hrs UK time. Yesterday saw a succession of soft economic data releases in the Eurozone, with both the German and whole-of-Eurozone PMI Services surveys showing that this key sector is in contraction. Later yesterday morning, Eurozone Retail Sales numbers showed that shop sales contracted at an annualised rate of 1% in the year to the end of August. This was considerably worse than analysts’ expectations of a 0.7% contraction.

Weak Eurozone data in recent weeks and fears that Eurozone economic growth may be threatened by stringent austerity measures in Greece, Italy and Portugal has given rise to market whispers that the ECB may consider cutting rates tomorrow. This would be a major surprise, however given the uncharacteristically dovish nature of ECB President Jean-Claude Trichet’s comments at the press conference which followed September’s policy announcement, it can not be ruled out. If the ECB do opt to start a new rate-cutting cycle later today, then it is likely that the Euro will come under pronounced selling pressure.


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