GBP/EUR Rate Extends Post-ECB Gains, Stournaras Agitates for Rate Cuts

Above: File image of Yannis Stournaras, Image: European Central Bank.

Euro exchange rates are under pressure ahead of the weekend amidst signs members of the ECB's Governing Council are agitating for interest rate cuts.

Yannis Stournaras, the head of the Bank of Greece, said Friday it was time to cut interest rates, confirming his belief that the ECB should deliver back-to-back rate cuts in June and July, followed by another two by year-end.

He argued that the ECB shouldn’t be afraid to shift its “overly prudent” stance on interest rates away from that of the Federal Reserve.

On Thursday, the European Central Bank said a June rate cut would likely be needed should the data extend its current trends, but it was cautious in talking up the prospect of any further rate cuts beyond June.

This data-reactive function provided the necessary uncertainty to avoid any major move in Eurozone interest rate expectations, offering support to the Euro. However, the selloff in the Euro, which extended into the Friday session, suggests that central bank policy is weighing on the Euro, helped by Stournaras' comments.

The Pound to Euro exchange rate has now extended its post-ECB decision gains and is at 1.1722, taking it towards the top of its range. The Euro to Dollar rate meanwhile looks to be breaking below the crucial 1.07 support line.

Lagarde's post-decision press conference revealed some members of the Governing Council thought interest rates should be cut in April, suggesting an eagerness to lower interest rates to secure an emerging Eurozone economic recovery.

"We see the first seeds of a recovery in Europe — also in Germany," Stournaras said. "We don’t want to kill these first seeds of recovery."

"The ECB communication indirectly had negative aspects for the EUR. This is because Lagarde gave the impression at the press conference that a number of Council members were already scurrying around and would have preferred to cut the ECB's key interest rates yesterday," says Ulrich Leuchtmann, Head of FX and Commodity Research at Commerzbank. "If it wants to cut as early as possible, the ECB might also want to cut as far as possible. That would be far more damaging for EUR carry."

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Stournaras also said it was time for the ECB to diverge from the Federal Reserve, which is now not expected to cut interest rates until September. A previous assumption was that the major central banks would prefer to cut interest rates in lockstep. But strong U.S. inflation figures mean the Fed will need to delay its own cutting cycle.

This divergence can pressure the Euro.

In March, Stournaras said, "we need to start cutting rates soon so that our monetary policy does not become too restrictive. It is appropriate to do two rate cuts before the summer break, and four moves throughout the year seem reasonable."

If delivered, this puts the Euro on a softer course.