GBP/EUR Forecast To Climb Following ECB Draghi?s Comments

April 3, 2014 - Written by Ben Hughes

STORY LINK GBP/EUR Forecast To Climb Following ECB Draghi?s Comments

This afternoon’s Press Conference from the European Central Bank President Mario Draghi yielded comments which could hurt the euro for months to come. The questions and answers session, which followed the European Central Bank’s announcement that it would be maintaining its key lending rate at its current record low of 0.25%, included a bomb shell development. The ECB is actively considering its own version of Quantitative Easing.

The European Central Bank might be a little late to the party, (the Federal Reserve and the Bank of England instigated their own versions of QE several years ago), but the effect of an asset purchase programme on the euro would be likely to be similar to that suffered by the US Dollar and Pound. The BoE and Fed’s QE programme heaped pressure on the Pound and the Greenback, sending the Pound euro exchange GBP/EUR rate sharply lower and the euro US Dollar EUR/USD exchange rate higher. The ECB’s talk of its "unanimous in its commitment to using also unconventional instruments within its mandate to cope effectively with risks of a too prolonged period of low inflation," is likely to see investors shift out of euro-denominated assets in the short-to-medium term.

However, the Pound euro exchange rate edged only marginally higher during this afternoon’s London session – the pair was trading at just below the 1.2100 GBP/EUR level just before the FTSE shutdown. One factor anchoring the pair was the suggestion earlier this week by ECB Vice President Vitor Constancio that his Bank expects, ‘that the low figure of inflation in March will be corrected.’ He backed up this attempt to discredit the latest CPI inflation numbers by stating that the ECB did not view deflation as a possible problem for the eurozone. In spite of Constancio’s words, the single currency is forecast to lose support as we head towards the weekend market shutdown thanks to the spectre of QE which now hangs over it.

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