EUR/GBP: Trading Places

EURGBP, Trading Places, Bank of England, Fundamental Analysis, fx trader, forex

14 Jan 2016

A six month chart of EUR/GBP demonstrates the high of £0.69529 per Euro, 20 July, followed by a steady decline to the 14 October low of £0.7438 per; down 6.98%.  From the low a strong reversal took the Pound back nearly to the 20 July high reaching £0.6998 per, on 18 November; up 5.92%. Then again, there is a sharp reversal nearly to the six month 11 January low at £0.74949, down 7.100%.

The Bank of England has kept a very steady hand on the policy tiller through CPI doldrums although having enough of an economic wind to sail past steadily declining unemployment levels and relatively respectable GDP growth at roughly 2.1%, annualized. On the other side of the channel, the European Central Bank has been navigating the shallows at every turn. The most recent HCPI1  measured 0.2%; positive but well short of what’s needed to achieve an annualized 2.0% target.

Yet, as commodity prices continued to collapse and China’s stock market resumed it steep correction, it seems that the market prefers the Euro over Pound Sterling. Some important points may be taken from the post meeting governing council statement delivered by ECB President Draghi. First Mr. Draghi noted that “...The latest staff projections incorporate the favourable financial market developments following our last monetary policy meeting. They still indicate continued downside risks to the inflation outlook and slightly weaker inflation dynamics than previously expected... ...and strengthen its resilience against recent global economic shocks...”

There were five additional steps added to supplement the existing policy: a 10 basis point reduction in the deposit facility; an extension of the duration of the €60 billion monthly asset purchase program; reinvestment of principal payments of held assets; an expansion of eligible securities and, lastly the continuation of its main refinancing operations.

The statement cites concerns for the global economy and perhaps the continuing mid-east conflict “...The risks to the euro area growth outlook relate in particular to the heightened uncertainties regarding developments in the global economy as well as to broader geopolitical risks. These risks have the potential to weigh on global growth and foreign demand for euro area exports and on confidence more widely...”  It should be noted that of total EU trade, intra-EU trade exceeds extra-EU trade by roughly 1/3. The most recent data indicates that North America is the largest extra-EU trade partner; China, x-Hong Kong, ranks third; Japan roughly fourth. Hence the statement may indirectly be expressing concerns over the Asia-Pacific region2.  The Asia-Pacific region is a significant export market for the EU as a whole; however, it’s more diversified by individual member in terms of total trade, products and services.

It’s import to note that at the time of the 3 December ECB Governing Council3 meeting, China’s stock markets were beginning to unravel and commodity prices had yet to establish a bottom. It’s reasonable to conclude then, that the Governing Council may have been concerned enough about the global situation to risk holding back on stronger policy actions should it need to react if the international situation worsened. (Which seems to be happening).

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