Pound Falls Against the Euro as Draghi Faces Mutiny in the European Central Bank
- Written by: Gary Howes
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Pound Rate Today: The pound sterling (GBP) saw Manufacturing PMI data offer fresh upside impetus at the start of the new week, however direction against the dollar and euro will ultimately depend on US data and the all-important ECB decision later in the week.
The UK Manufacturing PMI for October read at 53.2; analysts and markets had positioned the pound exchange rate complex for a reading of 51.4 suggesting they had massively under-estimated the robust health of the UK's manufacturing sector.
By pushing sterling higher they are reflecting the fact that the Bank of England may ultimately have to bring forward their first interest rate rise from mid-2015. As we can see from the following rates the impact on sterling is notable.
That said, in this piece we hear from analysts who reckon GBP will ultimately end the week lower. This prediction has become all the more possible following a massive euro rally on Tuesday on news that European central bankers are unhappy with ECB President Mario Draghi's management style (more on this below).
Pound, Euro and Dollar Rate Today (Tuesday):
- The pound to euro exchange rate conversion today: GBP/EUR is 0.40 pct lower on a day-to-day basis at 1.2746. It reached 1.2820 at one stage on Monday.
- The euro to dollar exchange rate conversion today: EUR/USD is 0.56 pct higher at 1.2554.
- The pound to dollar exchange rate conversion today: GBP/USD is 0.17 pct higher at 1.5979, it hit 1.6000.
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P.S: The above quotes are taken from the global FX spot market. It must be noted that your bank will widen the spread on the above numbers when passing on their retail rate to customers. An independent FX provider will however guarantee to undercut the bank's offer thus delivering you more forex. Please see more on this here.
ECB Mutiny Fires EUR Gains
Eurozone central bankers, who set policy at the ECB, plan to challenge European Central Bank chief Mario Draghi on Wednesday over what they see as his secretive management style and erratic communication and will urge him to act more collegially, ECB sources told Reuters.
The report says Draghi effectively set a target for increasing the ECB's balance sheet immediately after the policy-making governing council explicitly agreed not to make any figure public.
Irritation among national governors who hold a majority on the 24-member council could limit Draghi's space for bolder policy action in the coming months.
All Eyes on Thursday's Meeting
Upcoming days promise to be busy for FX markets with the two headline events being the ECB policy decision and associated press conference on Thursday and the US payrolls report on Friday.
Greg Anderson at BMO Capital says:
"Another week, another USD rally. This has become a pat phrase. By our count, the Fed’s narrow (G10) USD index has gained in 15 of the past 18 weeks, including roughly 1.2% over the past week,
"The market is already quite long of USD, but a firming of QE plans by Draghi and another strong US number could induce further USD upside."
Interestingly, those with an eye on the pound to dollar exchange rate (GBP/USD) should note that while the near-term could see the rate pressured lower by a stronger dollar, big galls could be due in 2015.
Anderson tells us:
"We think the USD can still grind higher over the next several weeks, but we still think thebiggest USD rally is more likely to land in Q1 of 2015 rather than Q4 of 2014."
Pound to Dollar Exchange Rate Forecasted to Move Lower
BMO Capital reckon that the most likely outcome for GBPUSD this week is a modest move lower.
"We expect no change in policy from the BoE rate decision on Thursday, but Carney’s Friday morning comments should be monitored carefully for any signals of a shift in thinking within the MPC. Carney’s previous comments have been supportive of rates, possibly due to the wide current account deficit and possibly due to housing market risks," says Anderson.
Analysts expect the Bank to stick with this tone next week, but anything unexpectedly dovish could force a break of 1.5900.
"Ahead of that, the FX market will pay close attention to key data Monday (Manufacturing PMI) and Thursday (September Industrial output). Even if the data is surprisingly strong, we think generalised USD strength will make it hard for GBPUSD to break back above 1.6100," says Anderson.
Euro to Dollar Exchange Rate Forecast Lower
Although EURUSD couldn’t hold below 1.2500 over the course of the past week, BMO Capital tell us they are looking for EURUSD to test the 1.2400/50 range next week.
With the global PMI round on Monday and Wednesday, US vs European economic divergence remain as a key theme heading into Thursday’s ECB rate decision.
What levels should those with an eye on the euro and dollar be watching out for?
According to Anderson:
"In the event that the ECB disappoints, we see 1.2600 as an initial resistance point and we would expect heavy selling interest above 1.2650 regardless of what the ECB says or does.
"We expect the ECB to somehow use the window of opportunity offered by last week’s Fed Statement to target weaker EUR. Another rate cut is not impossible, but the marginal impact of that option is decreasing with reserve interest already in the process of shifting away from the EUR."
That leaves more robust details from Draghi about asset purchase plans in the press conference as another possibility, although we think that investors looking for a sovereign QE signal next week will probably be disappointed.
"According to BMO Capital, a third possibility would be for Draghi to fill the press conference with a mixture of policy-supportive rhetoric, guessing games on sovereign QE and emphasis on structural reforms, while increasing the frequency and magnitude of its ABS purchases in the days surrounding the press conference.
"This would allow the ECB to maintain pressure on restoring the health of the banks and credit markets while presenting a powerful contrast to the Fed for the FX market. This latter option is what we think is most likely from the ECB."
