What is Forecast For Pound Euro Exchange Rate (GBP/EUR) If ECB Starts Quantitative Easing?

May 13, 2014 - Written by John Cameron

STORY LINK What is Forecast For Pound Euro Exchange Rate (GBP/EUR) If ECB Starts Quantitative Easing?

Currency News think piece: What Is Forecast For Pound Euro Exchange Rate (GBP/EUR) If ECB Starts Quantitative Easing? Yesterday’s session saw the Pound euro exchange rate spiral to a fresh 16-month high of 1.2280 GBP/EUR. The move, driven by selling pressure on the single currency, appeared to be a reaction to last Thursday’s comments from ECB President Mario Draghi suggesting that next month might bring the introduction of a Quantitative Easing programme for the eurozone. Draghi stated last week that his board was ‘comfortable’ with the idea of further extraordinary policy measures, leading analysts to question – what effect might QE have on the single currency?

The GBP to EUR exchange rate lost almost 8c.

It’s all been done before, so analysts have plenty of stats to base such a judgement on. The Bank of England began its Quantitative Easing programme in March 2009 – between then and the November of the same year, the Bank had authorised the purchase of £200bn worth of bonds (mostly government gilts). The Pound euro exchange rate stood at 1.1314 at the beginning of March 2009 and by the middle part of the same month, after the BoE QE announcement, the pair had dropped to as low as 1.0524. A loss of almost 8c.

The Bank of England went on to announce that it was set to add a further £75bn worth of bond purchases in November 2011. Taking the Pound euro exchange rate as a yardstick, GBP EUR was trading at 1.1383 during the final trading day of October 2011, but by the middle part of the next month, after the Bank’s announcement, the pair had touched 1.1785. This movement appears to suggest that the effect of QE was not universally negative for Sterling – the Autumn 2011 bout of asset purchase was well-trailed and was taken by investors as a positive sign that the UK’s central bank was taking affirmative steps to remedy the UK credit contraction.

The initial shock of asset purchase had hits teh US Dollar (USD) extremely hard

Turning to the USA, the Federal Reserve was a trailblazer for the post-credit crunch Quantitative Easing era. In the second half of November 2008 the US central bank began purchasing some $600bn of mortgage backed assets. At the start of this month, the euro Dollar exchange rate traded down to as low as 1.2387 EUR/USD, but within a year, support for the Buck had slumped and the euro Dollar exchange rate had broken up through the 1.5000 threshold. Once again it appeared that the initial shock of asset purchase had hit a currency extremely hard. November 2010 brought the announcement from the Fed of a second round of Quantitative Easing - QE2 – and once again the development caused a collapse in support for the US Dollar. EUR USD traded down to below the 1.3000 threshold that month and by the next April, the pair traded to within 2c of the 1.5000 level again.

The Fed’s final tranche of QE was announced during the middle part of November 2012. Perhaps the shock of the new was wearing off by this stage – EUR USD climbed during subsequent months, but by a less pronounced amount.

A QE programme for the eurozone is by no means nailed-on – analysts at leading investment bank Morgan Stanley stated yesterday that, "only if the economy would be at risk of falling back into recession would we expect the ECB to embark on QE." However, based on previous empirical evidence, the instigation of such a scheme by the ECB would send the GBP EUR exchange rate spiraling and the EUR USD exchange rate tumbling.

The latest Pound Sterling and Euro exchange rates are as follows:
- The Pound Sterling to Euro exchange rate is trading down -0.06% at 1.22582 GBP/EUR.
- The Pound Sterling to US Dollar exchange rate is trading down -0.01% at 1.68706 GBP/USD.
- The Euro to US Dollar exchange rate is trading up +0.05% at 1.37627 EUR/USD.
- The US Dollar to Euro exchange rate is trading down -0.05% at 0.72660 USD/EUR.
- The US Dollar to Pound Sterling exchange rate is trading up +0.01% at 0.59275 USD/GBP.

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