The Pound to Euro exchange rate (GBP/EUR) ended the day marginally higher yesterday after ECB President Mario Draghi hinted that the Bank is trying to work out the best way to embark on a bond-buying programme to help drive inflation higher.
Draghi said:
“All instruments that fall within the mandate, including QE, are intended to be part of this statement…there was a discussion of QE”.
This statement was interpreted as dovish for the single currency because in the past there had been question marks over the ability of the ECB to start a bond-buying programme within its monetary policy mandate. The QE comments suggest that policymakers are happy to embark on such a scheme, when they feel it is appropriate and when they are agreed on the best way to go about it.
Deflation Concerns
Eurozone CPI inflation printed at a 4-year low of 0.5% earlier this week and deflation concerns were heightened by news that the Producer Price Index fell to -1.7% last month.
It is no secret that the relatively strong value of the Euro exchange rate – Euro to USD recently struck a 2.5-year high – is pushing the Consumer Price Index lower. This is because a stronger Euro makes imports less expensive for businesses and therefore leads to lower prices for consumers.
The Eurozone’s climate of weak price pressures has been a key concern for policymakers over the last six months, however, the European Central Bank has only acted once: by reducing the benchmark interest rate from 0.50% to a fresh record low of 0.25% in November.
Rather than inject further stimulus into the Eurozone economy, the ECB has attempted to improve the situation by talking down the single currency. This tactic of verbal intervention has worked to a certain extent – Euro to USD tumbled by around -0.6 cents yesterday – and is currently two cents off its March peak. However, the single currency needs to depreciate much more before the region’s inflationary outlook will start to pickup.
Actions speak louder than words and traders appear unwilling to respond with any vigour to Draghi’s dovish comments. The ECB President needs to put his money where his mouth is and loosen monetary policy further. This is the only way to ensure that inflation does not sink into the doldrums of deflation.
UK Services PMI
The Pound to Euro exchange rate (GBP/EUR) only posted a slender daily gain of 0.2 cents yesterday because Sterling had initially plunged lower in response to a softer-than-anticipated UK Services PMI report. The headline index slid from 58.2 to 57.6 as new orders fell to their lowest level for ten months and business expectations sunk to a 5-month low. At its lowest point yesterday, GBP to Euro traded half a cent softer in response to the disappointing Service Sector data.
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