Pound Sterling to Euro (GBP/EUR) Exchange Rate Forecast: European Central Bank (ECB) Announcements Cause Dramatic Movement

The Pound Sterling to Euro (GBP/EUR) exchange rate was shaken today as the European Central Bank (ECB) made its expected announcements and the shared currency had an unexpected reaction.

ECB Makes Bearish Announcements in Efforts to Stimulate the Eurozone and Weaken the Euro (EUR)

After previous moves from the European Central Bank (ECB) to stimulate Eurozone growth had disappointed investors and left them with dovish mentalities towards the single currency, the central bank announced more severe measures today in an attempt to ensure economic stimulation in the Eurozone.

In highly unexpected results, the Euro gained considerable strength during ECB President Mario Draghi’s press conference this afternoon after dropping across the board initially. The GBP/EUR pair is currently trading at a rate of -0.8% and is trending at 1.2829, down on this morning’s levels of 1.2927.

Despite analysts and investors expecting interest rate cuts and stronger Quantitative Easing (QE) methods, the ECB’s announcements were far more aggressive than predicted. Both the deposit and main interest rate were cut, and QE was expanded by considerably more than forecast.

Eurozone interest rates were cut to zero after being expected to remain at 0.05% for the time being. This is a record low. The level of quantitative easing was increased to 20 billion to a whopping 80 billion Euros a month and the central bank will start buying debt issued by companies with the goal of returning inflation to target. The deposit rate was also cut from -0.3% to -0.4%.

Radical ECB Action Has Surprising Negative Effect on Exchange Rates, Including GBP/EUR

In an event that may well disappoint the central bank, the Euro began gaining against many of its rival currencies after Draghi announced that the ECB did not expect to have to cut rates again sometime soon.

This confidence filtered into investors, who rushed back to support the shared currency after its initial expected drop. This peculiar market movement was not an intended consequence of the bank’s announcements and is likely related to investors capitalising on the ECB being finished with easing for now.

Sun Global Investments CEO Mihir Kapadia warns that investors remain reluctant about the presumption of stimulus plans, citing ‘low global growth, global deflationary pressures and poor demand for credit in Europe’.

Domestic news has the Pound faring quite weakly in the face of scandalous developments in the ‘Brexit’ situation. The EU referendum dominated headlines once more this week as Bank of England (BoE) Governor Mark Carney made a statement on the risk of UK leaving the EU, causing controversy among critics.

Queen Elizabeth of England has also been pulled unceremoniously into the debate after The Sun’s front page headline claimed that she was hoping for a ‘Brexit’.

Fortunately, the British RICS House Price Balance rose to 50% in February, indicating that the UK housing market remains robust.

Unclear GBP/EUR Exchange Rate Direction after European Central Bank (ECB) Announcements Seem to Backfire

The ECB’s announcements were made with the intention and expectation that the Euro would weaken against its rivals afterwards – an expectation that has been undercut by investor activity seemingly favouring the Euro.

It is unclear what direction the financial market will head in as the reaction to Draghi’s press conference calms down. Some expect exchange rates to even out over time, the ECB of course desires for the Euro to weaken so prices can rise and the economy can be stimulated as planned.

Draghi commented during his press conference that the concept of ‘helicopter money’ (money that is literally made to be given to the public) is an ‘interesting’ one, leading some to question if he is considering it – something no other major economy has done before.
While the aftermath of the central bank’s announcements settle, investors in the Pound to Euro exchange rate also look forward to tomorrow morning’s data releases; final German CPI data and the British trade balance for January. The British trade deficit is forecast to worsen, and investors may react depending on how accurate this is.

Some analysts predict that Sterling’s current downtrend has gone on long enough to begin to expect a recoil of bullish movement in the near future.

The Pound Sterling to Euro (GBP/EUR) exchange rate is currently trending in the region of 1.2829 while the Euro to Pound Sterling (EUR/GBP) exchange rate trends in the region of 0.7794.