Top Story

Draghi’s modest parting gift to sterling

Sterling’s short-lived surge to a three-month high against the euro underscores both the ‘non-lethal’ nature of the ECB’s new bazooka as well as myriad Brexit pressures that remain for the pound. The rate’s immediate reaction was an 86-odd pip tip to tail slump to an almost three-month low (or high for the pound). But the euro subsequently moved to retake almost all of that a few hours afterwards.

The shared currency isn’t the only market that reacted like this. For instance, European bank shares went on a round trip that saw them shoot ahead of the overall market the instant the ECB said it was cutting rates and resuming QE, only to slump to the day’s lows soon afterwards. STOXX’s bank’s gauge eventually ended a tenth of a percentage point higher.

In many ways, the market anticipated this ambivalence quite accurately. For one thing, bank stocks have risen over the last few days, reflecting dwindling hopes of a ‘shock and awe’ policy announcement. Whilst overnight rate markets continued to price some sort of easing, the extent was doubtful. In the end, the 10-basis point deposit rate cut announced was close to the minimum the market was expecting. Investors also appear to have come to the same conclusion as ECB President Mario Draghi, who described the central bank’s package of measure as “adequate” this afternoon, possibly a signal that the Governing Council is coming around to the view that ‘unconventional measures’ are reaching the limits of their effectiveness. The bank’s new €20bn per month asset purchase programme has some mild tweaks relative to the previous round. That leaves the ‘tiered’ aspect of the new negative rates—which can exempt a large tranche of European bank deposits from punishment—as the key new condition overall.

Indeed, a rally across so-called core and periphery Eurozone sovereign rates suggests that the announcement of any new QE was a mild surprise to some investors, even if indications point to an expectation of increased QE to come.

All told, perhaps the pound’s modest reaction isn’t so much of a signal of the extent of underlying sterling weakness aa reflection of relatively tame ECB policy changes. On the other hand, sterling’s Brexit alert remains elevated, even during a Parliamentary hiatus. A Belfast Court added its verdict to those seen in recent days siding with the UK government, this time on whether a no-deal Brexit would break the Good Friday peace accord. Downing Street published no-deal plans as demanded by MPs, and they made for soberer reading than Prime Minister Boris Johnson earlier suggested. Either way, an early election which the market disfavours, and opposition politicians appear hesitant over, still looks to be on the cards this year. Sterling’s 4% advance off August lows was always going to be tough to extend on the back of ECB policy alone

EUR/GBP: Daily

Source: FOREX.com

Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.