Pound Euro Exchange Rate Forecast Volatile Today; Federal Reserve Minutes Send GBP to USD Rate Higher

Modified: Thursday, 23 August 2012 09:10 BST - Written by Frank Davies

STORY LINK Pound Euro Exchange Rate Forecast Volatile Today; Federal Reserve Minutes Send GBP to USD Rate Higher

The Federal Reserve minutes, released after the European equities close last night, have triggered significant movement in the currency markets. The US central bank’s eye-catching commentary stated that ‘additional monetary accommodation would likely be warranted fairly soon,’ unless there was a pronounced improvement in the relative strength of the US economy. July’s minutes had revealed that only a small minority of members of the Fed’s policy committee had advocated an extension of the US’s stimulus package. The Fed’s words spelled one thing in the mind of institutional investors… QE3. With market participants factoring-in a higher likelihood of a third tranche of quantitative easing for the world’s leading economy, the US Dollar initially sank on the currency markets, sending the GBP USD exchange rate to 1.5907 during last night’s Asian session. However, the rate has since retraced, as investors remember back to previous occasions when it has appeared ‘nailed-on’ that the Fed will be going down the QE3 route. The last occasion this eventuality appeared likely came earlier in the year; in the shakedown which followed, the Fed avoided further QE and plumped instead to ramp up ‘Operation Twist’. This is in effect the opposite of QE and sees financial institutions swap short term bonds for longer term gilts in an attempt to bring down the overall cost of borrowing for companies. More ‘Twist’ served to significantly strengthen the US Dollar, taking GBP USD down into the low 1.50s. We shall learn more about the Federal Reserve’s plans on 31st August, when Fed Chairman Ben Bernanke speaks at the Jackson Hole economics summit.

Elsewhere, today’s session could see further volatile price action for the GBP EUR exchange rate, as German Chancellor Angela Merkel hosts yet another meeting with French President Francois Hollande in Berlin. The main topic of debate will be whether the eurozone’s two leading economic powers should grant debt-burdened Greece additional time to affect the spending cuts required for it to meet its bailout targets. It appears likely that whether the Franco-German axis choose to take a hard-line on Greece, or whether they decide to ‘go easy’ on the Hellenic state, the markets are likely to view their action as euro-negative. The potential remains for the GBP EUR exchange rate to edge higher before the weekend.

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