GBP/EUR Rate Falls as ECB Cuts Interest Rates, But 1.50 Still Possible

The British pound has fallen notably against a recovering euro as markets react to news the European Central Bank has cut interest rates.

The euro has risen in relief across the board following the ECB decision to cut their deposit rate to -0.3% while broadening their asset buying programme to include regional debt. The cut was in line with analysts expectations but the expansion to the asset purchase programme was clearly not enough.

Markets had been expecting something exotic to be announced, for example a two-tier deposit rate being introduced.

What they got was the announcement that the Bank would start purchasing assets from regional administrations.

Markets had clearly been expecting more - the EURUSD has shot up by a percent while the GBPEUR has fallen by an eye-watering 1.55%.

Sterling / euro is now below the key support level at 1.40.

"We are not sure why, having promised so recently to be focused on the external risks to the Eurozone economy the ECB was willing to disappoint the markets in this way," says Alastair George, Chief Strategist at Edison Investment Research.

While the ECB claims not to target the exchange rate, the rapid depreciation of the euro since October may have given them pause suggests George.

ECB Couldn't Afford to Disappoint

The tone for the meeting was set 24 hours earlier when Eurozone flash CPI showed an unexpected fall in annual core inflation to 0.9% in November.

The data lent support to expectations that new ECB projections will show an even greater inflation undershoot in 2016 and 2017 than previously forecast.

Latest Pound/Euro Exchange Rates

	Live: 1.1391▼ -0.13% 12 Month Best: 1.2162
*Your Bank's Retail Rate	1.1004 - 1.1049
**Independent Specialist	1.1232 - 1.1277 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

President Draghi’s has stated his intention on doing “what we must to raise inflation as quickly as possible.”

“We believe the ECB cannot afford to disappoint, as it would likely result in renewed euro appreciation and further downward pressure on inflation,” say Lloyds Bank in a morning brief to clients.

Lloyds expect the ECB to reduce the deposit rate by 20bps to -0.4%, more than consensus expectations of a 10bps cut, with a two-tiered system of charges reportedly being mooted.

If Lloyds are right then we would expect the pound to euro exchange ate to rally.

Draghi could leave the door open for further cuts.

The refi rate is expected to be left at 0.05%.

“We also expect the QE programme to be expanded through a combination of a duration extension of at least six months and an increase in the monthly pace of purchases to €75bn,” say Lloyds.

Gains Above 1.50 Still Possible?

The pound has suffered losses against a recovering euro of late with the EUR/GBP seeing an Elliott wave count which advocates for a potential rally to 0.7130/75 before resuming its move lower.

Turning the equation around this equates to GBP/EUR falling to support at 1.40 ahead of an extension of the longer-term bounce.

Commerzbank’s Karen Jones says she maintains a positive view on sterling provided any further losses are held in the 1.40 region.

According to Jones the pound remains on target for the 1.44 July high and the 38.2% retracement of the move from 1971 at around 1.45.

This remains the next major technical point - a break above here will target the 1.52 high set in 2007.

While we would require a more bullish Bank of England to firm sterling's chances of a move above the 1.50 area we would suggest that the additional key driver to such a move would be the December ECB meeting.

Peak GBP to EUR in early 2016

Those with an interest in the longer-term prospects facing sterling against the euro should consider the latest forecasts from Deutsche Bank.

Analysts see GBP peaking in early 2016 before a raft of issues start to weigh on the currency. A maximum at 1.49 is predicted.