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Pound-to-Euro: Catalonian Climbdown Opens Door to Two Weeks of Decline Suggests ING

Catalonia boost for the Euro could be short-lived

"We have seen a trivial relief rally in the EUR and think that this may just be the start of a two-week window of EUR strength ahead of the big October ECB meeting," - Viraj Patel at ING Bank N.V.

The Euro is seen outperforming in the mid-week trading session and is trading at its highest levels against the Dollar in almost two weeks as Catalonia’s president Puigdemont said that he’ll seek talks with Madrid, thus stepping back from an immediate declaration of independence.

"With all the force of a wet noodle, Catalonia’s presumed declaration of independence was instead a weak climbdown, – prompting a rally of the Euro." notes Peter Rosenstreich, Swissquote Bank.

"Madrid's initial response has been equally unexciting with Prime Minister Rajoy saying he will merely seek clarity on whether Puigdemont has in fact declared independence.

The Euro is at 1.1825 vs. the US Dollar having been as low as 1.1738 in the run-up to the announcement by Puigdemont. The single-currency is also retaking ground lost against the Pound in the day prior; the Pound-to-Euro exchange rate has fallen back to 1.1160 having been 1.1227 this week.  

"The Euro received a better bid as Catalonia leader Puidgemont applied some kind of a ‘forward start’ for the start of the independence after the referendum," says Piet Lammens, analyst with KBC Markets in Brussels.

Puigdemont did declare independence for Catalonia, but facing sizeable pressure he also suspended it. He proposed "to start dialogue, to arrive at an agreed solution to advance with the demands of the people of Catalonia."

"With the results of October 1, Catalonia has won the right to be an independent state," said Puidgemont in an address to the regional parliament.

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What Does this Mean for the Euro Going Forward?

“The Euro profited slightly from the news from Catalonia. This process might still go a bit further this morning, but we don’t expect big Euro gains,” says Lammens who notes that the Catalonia question appears to have been more of a domestic issue and not one that has systemic implications for the broader Eurozone.

The Spanish government has this morning rejected a statement of independence signed by Catalan leader Carles Puigdemont and dismissed calls for mediation.

Spain's deputy prime minister described Puigdemont as someone "who does not know where he is, where he's going".

“Focus of today’s trading session will be on Spanish-Catalan issue. Uncertainty remains high at this stage and continues to warrant some cautiousness vis-à-vis Spanish assets, while it might even support some safe haven flows in the Bund especially if we get a strong verbal response from Madrid,” says Lammens.

The analyst adds that the stalemate in Catalonia isn’t solved and it doesn’t look the Spanish government is prepared to start negotiations.

But uncertainty is uncertainty, and some argue its removal from any currency equation will always tend to shift the tone in a positive direction.

Indeed, Viraj Patel at ING Bank N.V. in London reckons the “window of opportunity for an ECB-led rally may now be open.”

This suggests that markets are now able to flip from focussing on Catalonia to what really matters - the European Central Bank which is expected to announce the intention to cut back on its quantitative easing programme at either the October or November policy meeting.

“The move by Catalan leader Puigdemont to ‘suspend’ the referendum result was seen as a conciliatory outcome. We have seen a trivial relief rally in the EUR and think that this may just be the start of a two-week window of EUR strength ahead of the big October ECB meeting,” says Patel.

While political uncertainty hasn’t fully faded, ING see the focus for the currency turning back to the positive cyclical EZ economic story and prospects of a more hawkish ECB QE taper announcement later this month.

ING’s house view for a drop to €20-25bn monthly quantitative easing purchases from January 2018 (albeit for slightly longer) could see a one-off move higher in Euro exchange rate pairs.

Get up to 5% more foreign exchange by using a specialist provider by getting closer to the real market rate and avoid the gaping spreads charged by your bank for international payments. Learn more here.

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