Price Action For EUR USD Exchange Rate Sends GBP EUR Higher As ECB Slashes Eurozone 2013 GDP Growth Forecast

Published: Friday, 7 December 2012 09:00 BST - Written by Minesh Chaudhari

STORY LINK Price Action For EUR USD Exchange Rate Sends GBP EUR Higher As ECB Slashes Eurozone 2013 GDP Growth Forecast

The euro was the major loser during a busy day in the currency markets yesterday. As anticipated, both the European Central Bank and the Bank of England opted to maintain their respective monetary policies at current levels, however it was ECB President Mario Draghi’s comments which followed his Bank’s decision which sent the single currency lower. Draghi used his post-announcement press conference to reveal to the world that he was slashing the ECB’s official 2013 GDP growth forecast for the 17 nation euro area from positive 0.5% down to negative 0.3%.

Draghi went on to confirm that the ECB had also discussed cutting the rate of interest paid on deposits from institutional investors which it held overnight down to below zero. The introduction of short term negative interest rates has been muted as a possible means of getting the eurozone’s retail banks lending to businesses and individuals once more. Draghi described his Bank as being ‘operationally ready’ to carry out such a measure; the mere suggestion of the introduction of such a ostensibly Draconian policy heaped pressure on the single currency.

Perhaps most damaging of all of Draghi’s comments yesterday, from the perspective of investors holding euro-denominated assets at least, was his forecast that the euro will settle below the 1.3000 level against the US Dollar in the medium term. This became a self-fulfilling prophesy shortly afterwards when the EUR USD exchange rate headed back down into the 1.2900s yesterday afternoon, ending its recent foray into the 1.3000s. Price action for the EUR USD exchange rate had the knock-on effect of sending GBP EUR higher due to arbitrage trading. This in turn propelled the GBP EUR exchange rate to the edge of the 1.2400s as Europe’s equities session drew to a close yesterday.

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