Pound Euro Exchange Rate (GBP/EUR) Edges Lower Following BoE And ECB Interest Rate Announcements

March 7, 2013 - Written by John Cameron

STORY LINK Pound Euro Exchange Rate (GBP/EUR) Edges Lower Following BoE And ECB Interest Rate Announcements

Today’s two major global central bank policy decisions came out broadly in line with analysts’ expectations. The Bank of England opted to maintain its current policy stance – economists had been factoring-in a fair chance of an increase to the UK central bank’s ongoing Quantitative Easing scheme, following last month’s Monetary Policy Committee minutes which revealed that three members of the committee had voted in favour of more QE. The fact that the majority held their nerve today in voting to maintain the current status quo triggered some support for Sterling.

Meanwhile, forty-five minutes after the BoE’s announcement, the European Central Bank revealed that it would be maintaining its key lending rate at 0.75%. Again, this was not a major surprise to investors; however the press conference which followed saw ECB President Mario Draghi strike a significantly more dovish tone than in recent months. Draghi noted that inflation in the eurozone had dipped by more than had been anticipated during the month since the last ECB announcement. These words caused analysts to price-in an increased chance of near-term interest rate cuts by the ECB. Draghi went on to announce that the ECB was downgrading its growth forecast for 2013 and 2014 and trotted out his usual line regarding the potential for ‘downside risks’ to economic activity in mainland Europe.

In truth, Draghi’s comments didn’t bring anything new to the table – market participants were already well aware of the fact than eurozone inflation is waning and the ‘downside risks’ to eurozone economic activity are plain for all to see. The fact that the euro registered gains against the Pound at exactly the time Draghi took to his lectern in Brussels suggests that investors do not view his comments as ‘anti-euro’. The Pound euro exchange rate (currency : GBP EUR) had been trading as high as 1.1573 following the BoE’s ‘no QE’ announcement.

In spite of the ECB President’s revelation that his policy committee had ‘discussed a rate cute’, within 15 minutes of Draghi stepping ‘on stage’, GBP EUR had dropped back into the 1.1400s once more. It appears that by this time, the market had discounted both central bank announcements and investor focus had returned to the economic fundamentals – a criterion which does not suit Sterling.

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