The European Central Bank (ECB) introduced a massive stimulus package yesterday, but the Euro to British Pound (EUR/GBP) exchange rate’s reaction has been fairly mixed. The Euro has fallen from its best levels due to central bank dovishness and broad strength in its rival the US Dollar (USD). This is despite continued weakness in the Pound as Britain’s coronavirus outlook continues to worsen.
Following last week’s impressive EUR/GBP surge of four pence to the level of 0.9060, the pair initially looked to be in for similar gains this week.
After opening this week, EUR/GBP saw fairly soft movement until yesterday when it experienced a rocket in demand. Overnight, EUR/GBP touched on a high of 0.9493 – the best level for the pair in over a decade.
However, since hitting those highs EUR/GBP has tumbled again as the Euro’s appeal continues to lighten and the Pound is bought back slightly from its lows.
EUR/GBP is still around 2 cents above the week’s opening levels however. At the time of writing, WEUR/GBP is trending in the region of 0.9262.
EUR Exchange Rates Plunge as Investors Rush to USD
The Euro’s strong streak has come to an end for now, as investors sell the currency off in favour of the safe haven US Dollar.
Movement in the Euro has been more mixed since yesterday evening, when the European Central Bank (ECB) introduced a huge new stimulus programme for the Eurozone.
The news was a shock to markets and briefly boosted Euro demand despite the dovish shift. This is because there are hopes that the news could help protect the Eurozone economy from the coronavirus pandemic.
Overall, analysts were impressed with the news. According to Claus Vistesen, Chief Eurozone Economist at Pantheon Macroeconomics:
‘We have been very critical of the ECB in the past few weeks, primarily because we consider the message that monetary policy is close to its limits, with the inference that fiscal policy has to step in, as a very dangerous signal to send to markets, especially in this environment. We are happy to eat our words today, at least based on the scope and size of this package, and, just as importantly, the manner in which it is communicated to markets. The ECB has it’s mojo back, and that’s a good thing!’
While the news impressed investors, the Euro slipped today. Investors sold it back from its best levels amid lasting strength in its rival the US Dollar (USD). The market cooling slightly due to stimulus being ramped up may also have dampened Euro demand.
GBP Exchange Rates Lacking Drive as Bank of England (BoE) Cuts Rates Again
While the Pound benefitted from the tumbling Euro today, its potential for gains has been limited.
Sterling has been highly unappealing, being seen as a fairly risk-correlated currency as Britain’s coronavirus outlook continues to worsen. So far, the fiscal stimulus measures of Britain’s government have disappointed investors as well.
According to Ulrich Leuchtmann, Head of FX and Commodity Cesearch at Commerzbank:
‘There is still huge FX risk on all sides…The Pound has been seen as a particularly risky currency and everyone is dropping risk where possible,’
Despite the market’s aversion to the Pound, a surprising dovish move from the Bank of England (BoE) today didn’t do much to stop investors from buying the Pound against the tumbling Euro.
In an emergency announcement, the BoE cut its interest rates to 0.1% and expanded its quantitative easing (QE) programme.
Typically a dovish move like this would dampen Pound demand. However, hopes for stimulus to help protect Britain’s economy mean the Pound has found a little support in the news.
EUR/GBP Exchange Rate Forecast: Markets Continue to Await Stimulus
With the European Central Bank (ECB) and Bank of England (BoE) both ramping up stimulus to defend economies today over the past week, investors are a little more confident in central banks.
However, this is leaving eyes on the EU and UK governments and fiscal stimulus.
Investors are hoping for governments to ramp up fiscal stimulus and take more action to soften the damage of the coronavirus pandemic.
This is likely to largely overshadow upcoming data. German PPI and Eurozone construction data will be published tomorrow, but is unlikely to impact the Euro much.
The Euro remains fairly appealing overall as a funding currency, and the Pound is still seen as risky as the domestic coronavirus outlook worsens. As a result, the current Euro to Pound exchange rate losses could be short-lived and the pair may advance again soon.
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TAGS: Euro Pound Forecasts