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Pound-Euro Favoured Heading into ECB Meeting

Euro exchange rates ECB

Image © European Central Bank

- GBP/EUR spot: 1.1327, -0.50%
- Bank transfer rates (indicative): 1.1030-1.1113
- FX specialist transfer rates (indicative): 1.1180-1.1230 >> More information

Strategists at French-domiciled global investment bank Société Générale see the potential for the Euro to fall against the Pound heading into a crucial meeting of the European Central Bank (ECB).

The ECB decision - due at 12:45 GMT - is expected to see a raft of measures unveiled aimed at tackling the negative economic impacts of the coronavirus on the Eurozone economy.

With the majority of major global central banks having now cut interest rates, markets will be looking for a credible response from the ECB.

The market's judgement could therefore have an impact on near-term direction in the Euro exchange rate complex.

Kit Juckes, Global Head of FX Strategy at Société Générale is sceptical on the ECB's ability to deliver the kind of response that would allay fears the Eurozone is facing a sizeable economic crunch owing to the viral outbreak.

"After yesterday's UK MPC moves, no-one would be too surprised if there was a collection of measures that went well beyond rate cuts but I still struggle to believe that monetary policy can do much more than help alleviate cashflow and short-term funding problems. A fiscal reaction is still required. Which is why EUR/GBP should fall and also why shorts in EUR/JPY continue to make sense," says Juckes.

Ahead of the ECB, the Euro-Pound exchange rate is quoted at 0.8831, following a sizeable appreciation of 0.5% on yesterday's closing rate. This gives a Pound-to-Euro exchange rate of 1.1326.

Pound unanswered selloff Euro

Above: GBP/EUR has been subject to an unanswered selloff since late February.

We noted in an earlier article that the Euro remains well bid in the current environment of stock market weakness, due to technical reasons such as shifts in investor positioning and the flow of capital out of stocks and into euro loan accounts.

Therefore, while the fundamentals might favour the Pound, for now the overarching theme of coronavirus fears appears to be firmly in charge of Sterling-Euro relations.

Regardless, Juckes says he sees upside potential for Sterling over the Euro following the strong response to the coronavirus from UK authorities on March 11.

The government announced £30BN would be spent fighting the virus while the Bank of England announced a 50 basis point cut to interest rates and a facility to lend money to businesses.

"Bold fiscal action will soften the economic impact of the Covid-19 pandemic and should support Sterling. If there were a sensible UK/EU trade deal in place, this Budget might have made me think EUR/GBP would head to 0.80 or below. Even with the ongoing uncertainty, sterling's cheap at these levels," says Juckes.

0.88 in EUR/GBP equates to 1.25; this is clearly a longer-term expectation.

"This wasn't a sterling-unfriendly budget. Bold fiscal action is possible because of the restraint of previous years and regardless of the detail and the politics, fiscal easing will cushion the effects of the virus. Trade uncertainty is a constant but as we wait for the ECB meeting and for any kind of co-ordinated fiscal response in Europe, I think EUR/GBP should be lower," says Juckes.

However, Juckes acknowledges that in the short-run the Euro could record further advances as the EUR/GBP exchange rate appears to be tracking relative real yields, "so maybe I still need the rates market to price out further easing," says Juckes.

It is noted that the markets see a 50% chance of another 25 basis point cut at the Bank of England to be delivered by year-end.

This needs to come down if yields are to start favouring the Pound again.

EURGBP tracking yield differentials

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