Pound / Euro Rate Surges Above 1.30 on ECJ Ruling and SNB Shock Move

The British pound (GBP) cruised higher against the euro following a legal ruling that paves the way for the European Central Bank (ECB) to introduce new monetary easing measures in the Eurozone.

Monetary easing supresses currency valuations as it, broadly speaking, increases the supply of money into the economy. The simple concept of supply and demand dictates that prices (the exchange rate) should then fall.

The European Court of Justice (ECJ) has ruled that the Outright Monetary Transactions (OMT) programme is an “unconventional monetary policy measure”, but was nevertheless “necessary” and “in principle legitimate”.

Currency markets are now betting that because the OMT scheme was deemed legal there is little chance a sovereign Quantitative Easing programme would face legal opposition.

Also pusing the GBP higher and the Euro lower was a shock move by the Swiss National Bank to abandon its policy of keeping the value of the Swiss Franc suppressed. 

The euro was sold heavily on the news with the EUR/CHF falling 30% at one stage - an unprecendented move for a G10 currency.

The slump dragged EUR/USD and EUR/GBP lower.

"I would avoid EUR/CHF at all costs in coming weeks unless totally necessary as we are going to see too much volatility. We are likely to see intervention of some sort and plenty of jaw-boning. But the flight out of EUR is only likely to pick up more steam and I’d be looking for some less volatile crosses to play, like EUR/AUD, EUR/CAD and the old favourite EUR/GBP," says Sean Lee at ForexTell.

Forecasts for 1.30 GBP/EUR Now Looking Conservative

For the pound to euro exchange rate (GBP/EUR) the move to its current location at 1.2923 is significant.

Finally, the 1.28 resistance level appears to have broken.

As the below image shows, this point has scuppered sterling advances on many occasions.

Interestingly, the run to 1.3 leaves some of the forecasts reported on this site looking a little conservative.

Nevertheless, the take-away from the current price action is that we could be entering a new and higher range for the GBP/EUR.

Those with money transfer requirements should be under no illusion - these are good levels to purchase euros.

There are risks that the current move proves to be overblown and a correction lower in GBP takes place.

Furthermore we could be seeing all the news surrounding sovereign quantitative easing at the ECB now being fulling priced in meaning further upside potential diminishes.

That said, the trend is your friend as the saying goes, and as the chart suggests there is no technical basis to suggest the GBP/EUR upside has run out of steam.

Roll on QE

More on the euro-negative ruling from the ECJ.

Ipek Ozkardeskaya at Swissquote Bank tells us:

“At this point, the ECB has no difficulties in justifying intervention through unconventional channels. First, the threat of deflation is slowly concretising due to slow economic recovery in the Euro-zone.

“Second, the weak oil prices is set to push the deflation deeper and the inflation expectations further down in the coming months. It seems that the ECB has got the green light for a full-blown QE.”

Euro Dollar Forecast Lower

While the euro comes under sustained pressure against the pound, the same can also be said for the EUR/USD.

Technical indicators at Swissquote foretell of a potential test of 1.16:

“EUR/USD has thus far successfully tested the support at 1.1754, suggesting a potential short-term double-bottom formation.

“However, a break of the hourly resistances at 1.1871 is needed to confirm such scenario.

“Another hourly resistance lies at 1.1976. A key support stands at 1.1640. In the longer term, the break of the strong support area between 1.2043 (24/07/2012 low) and 1.1877 (07/06/2010 low) confirms the underlying bearish trend.”