GBP To EUR Exchange Rate Tumbles Following BoE ?Forward Guidance? On Interest Rates

Modified: Thursday, 4 July 2013 17:23 BST - Written by John Cameron

STORY LINK GBP To EUR Exchange Rate Tumbles Following BoE ?Forward Guidance? On Interest Rates

The Pound Sterling endured a torrid day on the currency markets yesterday, giving up ground against all of the other sixteen most-actively traded global currencies. The Pound to Australian Dollar exchange rate was trading down by 1.88% shortly after the UK equities close, while the Pound to New Zealand Dollar exchange rate had lost over 2% at the same stage of the day.

The sharp move against the UK tender was triggered by an unexpected action from the Bank of England. The BoE’s policy announcement went exactly as per expectations, with Britain’s base rate staying at 0.50% for another month and Quantitative Easing also remaining at its current level of £375bn. However, in a wholly unexpected move, the UK’s central bank issued an accompanying statement alongside its announcement and it was this publication which caused Sterling to flounder.

Most of the world’s major central banks issue a ‘forward guidance’ statement alongside their policy announcements and the new Bank of England Governor Mark Carney was well known for favouring such written missives during his time as Governor of the Bank of Canada. Yesterday’s ‘forward guidance’ from the Bank of England explicitly stated that the markets were wrong in assuming that the UK’s key interest rate would be increased in the short to medium term. The change of tack from the BoE caused investors to shun the Pound, sending the Pound to euro exchange rate (currency : GBP EUR) down to as low as 1.1580 on the day, having started out the session firmly established in the mid-1.1700s.

Losses for GBP EUR would surely have been of a greater magnitude were it not for a near-identical statement from the European Central Bank’s Governor Mario Draghi during his post-ECB announcement press conference. Using unerringly similar language to the BoE’s ‘forward guidance’ publication, Draghi stated that eurozone interest rates would remain low for an ‘extended period’. The ECB President’s words helped GBP EUR to recover somewhat; the pair ended the day down by only around 0.50%.

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