EUR/GBP Punished by Autumn Statement and ECB Rumours
- Written by: Gary Howes
The euro has fallen sharply against the pound in a move that confirms any strength in the pair should be viewed as corrective in nature until at least the December ECB meeting.
The euro to pound sterling exchange rate was offered the chance to rally to 0.7079 from the 0.6980 support zone earlier in the week - an impressive move and one that had us wondering if it was time to call an end to the pound's recent good run.
The British pound had been pressurised by a somewhat dovish sentiment from the Bank of England’s November Inflation Report Hearings.
"The GBP came under renewed selling pressure after Gov. Carney and his colleagues testified in front of the Treasury Select Committee," say Lloyds Bank, "the message was unchanged, that the next move in rates is likely a hike but unlikely in the near term.
This confirms, that from a Bank of England stance at least, the British pound will struggle to find support.
The euro then crumbled spectacularly in mid-week trade on a two-pronged attack.
Firstly, the Autumn Statement, delivered by the Chancellor of the Exchequer George Osborne, has had a positive effect on the British pound in that UK growth assumptions for coming years were revised higher while cuts to spending were reduced.
In fact, the strength of the pound's reaction has taken us and others in the market by surprise.
"EURGBP was far more aggressive in its decline, slumping back towards recent lows after the pound had suffered earlier in the week on the back of BoE MPC members being a little more dovish than perhaps expected. The price action in the pound surprised us as the rates market is already priced for no rate hike in the UK until the very end of 2016/early 2017," say Lloyds.
Volumes in the EUR/GBP spiked around the Autumn Statement as traders stepped into the market to take advantage of a perceived recovery in the pound.
"The statement was less austere and that is good for growth. As a result, sterling rose and clearly we are seeing more gains against the euro," says a brief from ING on the matter.
Stronger growth in the UK could ultimately see the Bank of England forced into bringing forward their first interest rate hike.
Latest Pound/Euro Exchange Rates
  | Live: 1.1391▼ -0.13%12 Month Best:1.2162 |
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| 1.1004 - 1.1049 |
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* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
ECB Continues to Undermine EUR into December
A report from Reuters is credited for promoting a sudden drop in the euro exchange rate complex following a period of consolidation.
Sources quoted by the newswire suggest the ECB is discussing 20 options for next week, including the potential for a split deposit rate based on the amount of deposits being placed at the ECB.
This would seem to increase the lower bound potential for short-end Euro rates and reinforces ongoing market expectations that the ECB will be more aggressive than expected.
One institutional analyst reckons no one in the market is going to call the ECB’s action next week perfectly given all of the freethinking going into this discussion.
"The ECB will act more aggressively than the market expects next week in order to reinforce this recovery and increase the chances that inflation will return to target sooner rather than later," says Richard Kelly, analyst with TD Securities in London.
While the euro is being pressured lower it is worth point out that support between 0.6930 and 0.6982 remains substantial and we don't believe UK gilts will be able to rise enough to initiate a break through this level.
The only event that would prompt such a move would be the Bank of England who need to bring forward the timing of their first interest rate rise of the upcoming cycle.
Of course, a hefty rate cut / agressive easing action at the ECB in early December could force down Eurozone yields to an extend the euro breaks through this support zone.
However we feel markets may have already discounted the ECB action into the exchange rate and the prospect for a squeeze higher remains a real danger for those expecting the euro to pound exchange rate to maintain its decline.
