Best Levels of 2014 Being Held By GBP/EUR as the ECB Threatens Fresh Action

The euro exchange rate complex remains at fresh lows and now offers those selling dollars and the British pound the best rates of exchange in over a year.

The possibility of the best pound to euro exchange rate (GBP/EUR) of 2014 being achieved this week was always on the cards but the speed at which it was achieved was made possible by the realease of dire inflationary data.

At the time of writing the pound to euro is trading a further 0.16 pct higher than at the previous day's close, the conversion is seen at 1.2857. The euro to dollar rate is meanwhile 0.13 pct lower at 1.2614.

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Inflation Data Offers Best Euro Exchange Rates

"EURUSD’s decline reached a new benchmark overnight, edging to a new cycle low yesterday, dropping to a fresh two-year low just below 1.26 in response to the slower-than-expected (core) inflation growth in the Eurozone for September. From a broader, thematic perspective, we remain conviction USD bulls and fully believe the USD rally has further room to play out in the coming months," says Shaun Osborne at TD Securities.

Core inflation has fallen to a five year low, Eurozone core CPI printed at 0.7% versus 0.9% eyed - well below the ECB's target of 2%.

Beware the Euro Relief Rallies

This note from Phil Seaton at LS Trader nicely explains how the prospect of a corrective bounce in the euro exchange rate complex has become a real possibility at the current time:

"The Euro dropped to its lowest level in 2 years on the basis of the back-adjusted continuous contract. On the basis of sentiment, not a reliable timing indicator by any stretch, there is barely a Euro bull left.

"What this effectively means is that pretty much everyone who wanted to sell Euros already has so there will be little in the way of further selling pressure from new sellers. Therefore a bounce can be expected but this will not put much of a dent in the very established downtrend, and following a corrective bounce, if it comes, much lower levels should be seen over the coming weeks."

Long-Term: British Pound to Find Support on Policy Divergence

The outlook for the pound sterling remains constructive at this stage owing to the belief that the Bank of England will start raising interest rates in early 2015.

Rising interest rates are a positive for currencies; while the BoE raises rates the European Central Bank remains firmly on the path of rate cutting.

The ECB could also be about to announce fresh bout of balance sheet expansion with the prospect of billions of euro being pumped onto the markets becoming a real possibility.

"The ECB, BoJ and even the PBoC heading towards additional stimulus due to weak growth forecasts (equities still have value over bonds). While in the US and UK central banks will continue to reinforce divergence in monetary policy. Given this deviation we remains constructive on the USD and GBP while generally supportive of global equities," points out Peter Rosenstreich at Swissquote Research.

Euro Bouce-Backs Will Remain Shallow

So the theme for the week ahead is one of potential euro strength as its oversold position becomes exhausted.

That said, the longer-term trend is certainly negative.

Manuel Oliver at Credit Agricole says:

"Mainly due to further rising expectations of the ECB considering even additional policy measures, the EUR has been continuing to depreciate this week.

"Indeed, ECB President Draghi just indicated last week that they could use additional unconventional policy measures in order to reach price stability.

"From that angle this week’s focus shifts to bot inflation data and the central bank’s monetary policy announcement.

"Although we do not expect any major changes as soon as next week, central bank President Draghi will likely keep investors’ monetary policy expectation strongly capped, to the detriment of the single currency. All of the above stands in contrast to the US, where the focus shifts to this week’s labour data release.

"As we anticipate further improving US growth conditions, we see scope of further diverging ECB-Fed monetary policy expectations to the detriment of EUR/USD."