GBPEUR: Could We See Further Easing From the ECB?

Euro strength creates a difficult situation for the European Central Bank (ECB) to navigate, by changing monetary policy amid weak growth and deflation. The rhetoric against the strength of the common currency may ramp up with further ECB easing likely, which could cause further euro strength, according to HSBC.

“What strikes us is how divergent the EUR’s broad rally is vs. the economic backdrop in the bloc. We believe the Eurozone economy will find it incredibly hard to accommodate a strong currency for any sustained period of time. Therefore the euro strength looks unsustainable. While the markets might be ignoring this for now, at some point, it will matter and the dissonance will be and facing deflationary pressures, the EUR’s strength is creating much tighter financial conditions than would otherwise be in place. The market may not care about this disconnect for now, but it creates a big headache for the ECB. Through analysing the raw text of ECB communication we see that the ECB is referring to financial conditions more than ever before.”

“In the current environment, where EUR strength is much less justified by the economic backdrop than it was in 2017-18, we believe the ECB’s rhetoric on FX is likely to ramp up with further easing likely. With markets preoccupied by the Fed’s policy framework shift to average inflation targeting, the risk of such a shift by the ECB has been completely ignored for now. As and when this happens, further strength in the EUR should be curtailed.”

Brexit

The GBPEUR key market mover continues to be Brexit. Sterling remains extremely fragile due to the lack of clarity surrounding the situation with Boris now making a no deal scenario not seem so bad in the press, perhaps preparing us for the worst.

Fisheries seems to be an issue that simply can’t be resolved, with Michel Barnier at one point saying he is unwilling to come back to talks. Merkel has stated she wants to go over his head in order to try and get a deal done, but whether she has the power to make such a move is a question yet to be answered.

You have to ask yourself whether it is in the best interests of the EU for the UK to leave with a favorable deal.

If Britain were to leave with a decent deal what would stop other members of the bloc following suit?

Could it be that Barnier has a mandate and he intends to stick to it?

At this point a no deal scenario is looking like the more likely outcome. Boris has now said we need a deal in place by 15th October or the UK will leave the EU without a deal.

Commerz Bank have predicted that GBPEUR could fall as low as 1.02 although I am not so pessimistic. The market moves on rumour as well as fact and the fact that the historic average on GBPEUR is 1.33 and we now sit at 1.11 says a lot.

That said, the impact of a deal being agreed could still be fairly muted, as with such a limited period of time to get a deal over the line the likelihood of a favourable deal being agreed is decreasing. Therefore the markets will react accordingly as to the quality of the deal. It could be the case there are no great shakes.

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