Sterling soars to a high as Euro collapses

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JUNE has seen the euro weaken massively as Sterling – Euro saw record highs in 18 months surpassing the 1.25 mark. This commenced due to a good run of UK economic data, also showing that the unemployment rate had fallen to a five year low.

However, the biggest news in the Eurozone came from the European Central Bank (ECB), finally announcing major moves in interest rates and starting on the long path to eliminating fears of deflation. Having experienced just 0.2 per cent growth in the first quarter of 2014 and falling inflation levels – from 0.7 per cent in April to 0.5 per cent in May – pressure mounted on the ECB at the start of the month to finally take a long-awaited action.

On June 5, The European Central Bank announced a set of measures to promote growth and soften deflationary pressure currently affecting the Eurozone economy. These involved the cutting of all interest rates.

In a milestone move, the ECB lowered the main refinancing rate from 0.25 per cent to 0.15 per cent and cut the deposit rate for banks from 0 per cent to -0.1 per cent. This is the first time the central bank has set a negative rate. This means that banks in Europe will be required to pay the ECB for the right to park their reserves with the central bank.

By charging banks interest it hopes to motivate them to lend to businesses, which should help stimulate growth in the Eurozone economy. This is an extraordinary move that has never been tested before on such a large scale and it is the boldest step that the ECB has taken, so far, to stimulate growth and inflation in the region’s economy.

Mario Draghi, the President of the European Central Bank, also introduced €400 billion of cheap credit in the form of Longer-Term Refinancing Operations (LTRO) and suspended sterilisation of government bonds previously bought, which should inject about €170 billion into the economy.

Although the ECB has not gone as far as introducing a quantita-tive easing programme (as implemented by the US Federal Reserve),  Draghi stated that the central bank is willing to consider more measures to raise inflation, if necessary, by stating “we are not finished,” hinting very clearly that more stimulus was possible and that Quantitative Easing might follow shortly.

Mid June – we saw the GBP-EUR rate increase further by hitting the 1.25 mark as Mark Carney, Governor of the Bank of England, warned that UK interest rates could increase sooner than the market had expected. Meanwhile, the Euro has continued to tackle its problems, which were highlighted in manufacturing readings from Germany, France and the broader Euro region on June 23 as they fell short of expectations, adding to current weakness in the shared currency. ECB chief Mario Draghi has also hinted that interest rates are likely to stay at record lows for at least another 18 months as inflation rates remain at a dismal 0.5 per cent way off the targeted 2 per cent level.

On a more positive note for the Euro – we saw Sterling weaken slightly against the single currency towards the end of June as Mark Carney met with the Treasury Select Committee where it was mentioned that stimulus would not be removed as there are risks to economy and rates will continue to rise. Overall, a dismal month for the Euro – one of the worst months to sell Euros and best months in 18 months to purchase Euros! 

Peter Loveday, [email protected]

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