Volatility Forecast For Exchange Rates: Pound, Euro & Dollar On Central Bank Policy Announcements

Modified: Thursday, 7 August 2014 11:34 BST - Written by John Cameron

STORY LINK Volatility Forecast For Exchange Rates: Pound, Euro & Dollar On Central Bank Policy Announcements

Today’s session promises to be a significant one for the world’s major currencies. Monetary policy announcements from the Bank of England and the European Central Bank are likely to ensure pronounced price action for euro and US Dollar-based pairs. This morning we take the opportunity to assess the potential effect of today’s risk events.

The POUND STERLING (currency:GBP) has floundered over the past week since the International Monetary Fund asserted that the UK tender is overvalued by as much as 10%.

It appears highly unlikely that the Bank of England will alter its current monetary policy stance later today, and the BoE is equally unlikely to issue an accompanying forward guidance statement. The Pound is therefore forecast to trade on a NEUTRAL footing moving forward.

The EURO (currency:EUR) is entering the dangerzone as today’s session gets underway.

The European Central Bank set out details of its plans for targeted Long Term Re-financing Operations, aimed at staving off a damaging bout of deflation in the euroland, a month ago.

The intervening period has brought the release of inflation data which suggested that the rate of price rises in continental Europe has fallen once again. If ECB President Mario Draghi responds to this development by suggesting that his Bank may go down the route of all-out Quantitative Easing, involving the purchasing of euro area sovereign debt, then expect the single currency to fall further across the board.

The outlook for the euro is therefore NEGATIVE and the current GBP EUR exchange rate stands at 1.2602.

The relative value of the US DOLLAR (currency:USD) is likely to alter via arbitrage funding thanks to today’s central bank policy announcements.


The world’s leading currency pair, (judged by daily volumes traded), remains EUR USD. A slump in the value of the euro this afternoon would cause EUR USD to fall and the Buck would register gains against the world’s other major currencies as a result. Any improvement for the Greenback could readily gain momentum, given that Tuesday’s ISM survey showed that growth levels in the American non-manufacturing sector were at their highest for almost a decade. The news that Russia may be sending its troops into Ukraine as part of a ‘peace-keeping’ mission could trigger further safe haven support for the US tender, which is now forecast to trade with a NEUTRAL TO POSITIVE bias moving forward. The GBP USD exchange rate stands at 1.6850.

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