EUR/GBP FX - Euro to Pound Currency Exchange Rate Claws Back Losses After ECB Rate Decision

September 7, 2014 - Written by David Woodsmith

STORY LINK EUR/GBP FX - Euro to Pound Currency Exchange Rate Claws Back Losses After ECB Rate Decision

EUR/GBP - The Euro to Pound currency exchange rate traded slightly higher as last week came to a close, following the common currency's gigantic flop.

Major currencies saw fluctuation from the result of the European Central Bank’s’ (ECB) decision to lower its interest rates even further to a highly surprising 0.05%, the lowest the Eurozone has ever seen.

The Euro's conversion rate dropped sharply on Thursday against other majors, but the Single Currency appears to be clawing back some of its losses on Friday following the release of favourable German Industrial Production figures this morning.

European Central Bank Decision Affects the Euro Exchange Rate

German Industrial Production figures jumped far higher than economists had forecast on Friday, reaching a substantial 2.5% in July, bettering predictions of only 0.6%; both figures however fared more favourably than the -0.4% June saw. Germany is relied upon as the workhorse for the Eurozone to help revive the currently flat lining recovery. Economist Evelyn Herman commented: ‘While there has been a lot of uncertainty, German industry is generally good. With factory orders up in July, I think the downsides risks are off.’

The ECB however has surprised many with its decision to slash interest rates; however, other alternatives looked less favourable with the Germany sure to denounce any suggestion by the central bank to introduce quantitative easing (QE). Furthermore the ECB announced its decision to start the purchase of asset-backed securities (ABS) in an attempt to make lending more attractive and aid Eurozone growth and inflation. However, this last ditch attempt, is surely the last option to the ECB before quantitative easing has to be introduced to aid the Eurozone recovery.

Rate Slash Last Ditch Attempt to Manage Eurozone before Quantitative Easing?

Whilst QE may not be appealing to powerhouse Germany as it would enable other less effective economy’s much needed bail out, the European Central Bank is the only leading bank to not undertake the programme since the Great Recession in 2008. Furthermore, some believe yesterday’s revelation is the effect of differences of opinions within the European Central Bank. President Draghi stated yesterday: ‘Some of our governing council members were in favour of doing more than I have just presented, and some were in favour of doing less, so our proposal strikes the middle of the road. A broad asset purchase programme was discussed, and some governors made clear that they would like to do more.’

But what would quantitative easing mean in the Eurozone? Draghi gave this definition: ‘QE is an outright purchase of assets. To give an example: rather than accepting these assets as collateral for lending, the ECB would outright purchase these assets. That’s QE. It would inject money into the system. Now, QE can be private sector asset-based, or also sovereign sector, public sector asset-based, or both.’

However, this statement was met with disagreement from some, who believe Draghi’s definition of QE isn’t quite as accurate as it could be. Industry expert Ray Attrill responded: ‘Somewhat incredulously, Mr Draghi refuses to classify the ABS/CBP as QE and also admitted there was only a “majority” of council members supportive of today’s decision.’

The Pound however saw the decision by the Bank of England to maintain their current low interest rates of 0.50%. Moreover, until the release of the Meeting Minutes later this month, speculation will mount as to the likelihood of another split vote by board members with last month signalling the first vote that failed to reach a unanimous conclusion since 2011. Both currencies are likely to remain low against other majors in light of this week’s bank decisions; however, the Euro looks as if it may remain bearish for longer as the Eurozone recovery flounders.

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