Pound Euro Exchange Rate Under Pressure Following ECB President Draghi?s Comments

Published: Monday, 29 October 2012 09:00 BST - Written by John Cameron

STORY LINK Pound Euro Exchange Rate Under Pressure Following ECB President Draghi?s Comments

The eurozone took a step closer to becoming the ‘Federal State’ which many British cabinet members appear to fear yesterday, when European Central Bank President Mario Draghi gave his public backing to German Finance Minister Wolfgang Schaeuble‘s recent calls for Brussels to be given the power to dictate nation states' national budgets. Draghi’s words will strike fear into the hearts of Conservative party members of the UK’s ruling coalition government, who remain suspicious of a German-led ‘grand plan’ for the euroland. With both Germany and EU policymakers demanding a ceding of sovereignty by individual nation states, the UK’s future as a part of the EU looks to be increasingly untenable. Britain, along with the Czech Republic, is in a group of two of the 27 member states which has refused to ratify existing proposals for alterations to the region’s budgetary rules. Yesterday’s development makes an EU without Britain an increasingly likely prospect.

Eurozone policymakers, including Draghi, have consistently made mention of the need for deeper political and economic union for the region since the advent of the EU’s debt crisis, without going in to any specifics. On each occasion, the euro has made gains on the back of these comments – the markets view direct action to difficult circumstances as a positive. Now that two of the eurozone’s most senior political figures have advocated a direct plan to achieve these goals, it would appear likely that the euro will enjoy further support.

Meanwhile, yesteryear’s comments from Draghi have had the additional effect of putting further political and economic distance between the UK and mainland Europe. The more that Britain appears cast adrift from her erstwhile European partners, the less institutional investors are likely to want to hold Sterling-denominated assets, in the near-term at least. The upshot of Draghi’s statement may therefore be a renewed bout of selling pressure on the GBP EUR exchange rate, with last Monday’s 6-month low of 1.2247 now becoming a near-term target for the pair.

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