Pound Euro Exchange Rate Collapses; GBP/EUR About to Test Key Level of 1.2 Again!

By Gary Howes

The pound to euro exchange rate has come under renewed pressure as currency markets begin to get the hint from the Bank of England that they have mis-priced their dates on interest rate rises.

In early afternoon in London we see the pound to euro exchange rate (GBP to EUR) is trading 0.73 pct lower at 1.2060. This brings support at 1.2 sharply into focus. The rapid decline in the GBP is quite astonishing as the main graph shows.

Note: Our EUR quotes are taken from the wholesale spot markets. Your bank will charge a spread at their discretion when passing on a retail rate. However, an independent FX provider is so well placed on the market that they are able to deliver you up to 5% more currency. Please learn more here.

British pound sterling weakens as markets finally get the hint

The Bank of England has spent recent months emphasising to markets that it will only consider raising interest rates once the 7% unemployment threshold was breached.

The Bank had been hoping this would be at some far off date in the future. With UK unemployment falling sharply markets had started pricing in an interest rate hike by as early as the final quarter of 2014.

So what does the Bank do now that its plan is being torpedoed by an improving economy? It just scraps its plans! Overnight the Governor of the Bank of England pretty much buried his Forward Guidance policy and says the Bank of England will no start considering a broad range of indicators when deciding on interest rates, i.e how it made decisions before the arrival of Carney.

Mark Carney has told the Davos forum:

"The degree of stimulus will remain exceptional for some time. That should help reassure British business that the path of interest rate will be consistent with a sustained recovery.

"Many of the headwinds holding back the economy will remain for some time yet. These persistent headwinds mean that, even in the medium term, the level of interest rates necessary to sustain low unemployment and price stability will be somewhat lower than before the crisis."

If markets see no chance of an interest rise in the foreseeable future we can expect Sterling to come under pressure as market readjust their views accordingly which is precisely what is happening.

Euro strengthens across the board

Meanwhile, markets have rediscovered their appetite for all things euro over the course of the past 24 or so hours.

The single currency regained control in yesterday’s session after the latest Markit Purchasing Managers Index (PMI), an indicator of overall business activity, reported that the PMI of the Eurozone hit 53.2 in January exceeding last month’s PMI of 52.1.

This was a strong outcome and prompted a flurry of euro buying just as investors started to get cold feet over their exposure to the sterling.

Ahead we have event risk from ECB President Mario Draghi who is to address the Davos forum.

Any talk of a further interest rate cut should encourage euro weakness but the chances of any market-moving information being divulged is unlikely.