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Pound-to-Euro Jumps Back Above 1.09: Lib-Lab 'No Deal' Pact and ECB 'Bazooka' Talk Drive Gains

Corbyn at rally

Image © Andy Miah, accessed Flickr, reproduced under CC licensing conditions

A combination of UK political developments and suggestions that the European Central Bank is readying a substantial stimulus package for the Eurozone economy conspired to push the Pound higher against the Euro into Friday.

The Pound-to-Euro exchange rate went to a 10-day high at 1.0922 Thursday following the duo of events, and it appears the UK currency could finally snap a record-breaking run of 14 successive losses against the Euro.

Sterling has fallen for 14 consecutive weeks against the Euro, but is 1.50% up on the week thus far on Friday suggesting there is a good chance the decline will finally be snapped.

The British Pound rallied on the latest developments in UK politics that show moves are afoot amongst the Labour and Liberal Democrat parties to topple the Boris Johnson Government and replace it with a caretaker cross-party Government that will have the express aim of delaying Brexit.

"Sterling is making new highs for the week today... some Sterling demand seems to be a function of cross rate adjustment. Sterling's record 14-week slide against the Euro is over. The Euro is off more than 2% against sterling this week," says Marc Chandler, Chief Market Strategist at Bannockburn Global Forex.

Moves towards an alternative government were sparked by an overture by Labour Party leader Jeremy Corbyn to MPs across the political divide that saw him suggest a vote of no-confidence in Johnson's government, and that he leads a caretaker administration. The caretaker regime would be short-lived and seek only to delay Brexit and oversee a new General Election.

While the advance was dismissed by the Liberal Democrats, there are nevertheless signs that MPs opposed to leaving with a deal are working towards a solution, and any deal could even potentially include the holding of a second EU referendum. Other parties - all of which would be key to forming a cross-party majority - are however apparently open to Corbyn's plan, and this could yet push Swinson's hand.

SNP leader, Nicola Sturgeon, said her party was “willing to work across party lines and explore all options to stop a no-deal Brexit”. She said: “Jeremy Corbyn’s suggestion is not the only possible option – but given the circumstances, nothing should be ruled out at this stage. Jo Swinson should rethink.”

Caroline Lucas, the Green MP, tweeted a video message appealing to Swinson to change her mind. She said: "Jo, we need to stop Boris Johnson. We need a people’s vote. Please join us in engaging with Corbyn to see if we can find a way forward."

Sterling snaps losing streak

Above: GBP/EUR could make its first weekly gain in weeks.

William Hill are offering odds that suggest the chances of a 2019 General Election stand at 77%.

Ladbrokes and Betfair are offering odds that imply a 75% probability.

Typically, Sterling tends to decline ahead of General Elections, with traders fearing heightened uncertainty, but it is worth pointing out currency markets have already drunk bucket loads of negative news on the political front.

For now, Sterling appears to be finding a bid on the developments.

"Some may deem an election extremely unpredictable and the Pound to fall as a result. But equally some may see an election as the catalyst for a positive change in the direction of all things Brexit," says Jordan Rochester, a foreign exchange analyst at Nomura.

"The summer recess has not yet been as uneventful as expected, with Boris Johnson and his comrades-in-arms continually reaffirming the possibility of Britain leaving the EU without a deal. In principle, however, we still work on the assumption that a no-deal scenario will indeed be prevented, given the disastrous repercussions for the UK and the EU. Sterling is significantly undervalued, especially against the Euro," says Marc-André Fongern, Strategist with MAF Global Forex.

Robin Wilkin, a cross-asset strategist at Lloyds Bank says "a price dynamic change" occurred yesterday, with the exchange rate breaking above intra-day resistance in the 1.0860 region.

Wilkin says "there is room in the near term" for another leg higher, however, technical resistance in the 1.0960-1.10 region might cap advances and those looking to transfer out of Sterling into Euros should be aware of such a development.

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ECB Prepares a Bazooka, Euro Retreats

Euro

Image © European Central Bank

The Euro exchange rate complex came under pressure as the Pound was finding a little relief.

The Euro underperformed its rivals over the past 24 hours amidst suggestions the European Central Bank (ECB) is readying a sizeable programme of easing in order to boost Eurozone economic activity.

A climate of sluggish growth and subdued inflation in the Eurozone has heightened expectations the ECB will intervene with more stimulus at its September meeting, but for the exchange rate to fall materially it will have to ‘over-deliver’ on stimulus compared to current market expectation.

Olli Rehn, Governor of the Bank of Finland, said the slowing global economy would see the ECB rolling out fresh stimulus measures that should include “substantial and sufficient” bond purchases as well as cuts to the bank’s key interest rate.

“It’s important that we come up with a significant and impactful policy package in September,” said Rehn.

“When you’re working with financial markets, it’s often better to overshoot than undershoot, and better to have a very strong package of policy measures than to tinker,” Rehn said.

Stimulus in the form of quantitative easing - or money printing - is negative for the Euro because it increases liquidity and supply, diluting unit value of the currency.

It is also negative for the Euro when the ECB lowers interest rates because it reduces net inflows of foreign capital since foreign investors prefer jurisdictions where rates are higher and they can earn more interest on their capital.

A cut in the deposit rate - the rate which the ECB charges commercial banks to look after their cash - is the most likely scenario in September, according to the market which is now pricing in a very aggressive 30 basis point cut down to -0.70% from a current level of -0.4%.

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