The European Central Bank (ECB) yesterday introduced a major stimulus package as it seeks to revive an ailing Eurozone economy, cutting interest rates for the first time in three years and restarting its giant bond-buying programme. The central bank cut its deposit rate – the interest banks receive on excess cash kept at the ECB – by 10 basis points, which the market was expecting, to minus 0.5 per cent. Mario Draghi said that the onus is now on governments to boost stubbornly low growth and inflation.
Under the restarted bond-buying programme, known as quantitative easing (QE), the ECB will buy €20bn of mainly government bonds each month from November and will continue to do so until inflation rises to two per cent. The euro fell as much as 0.7 per cent against the dollar following the announcement but has since rebounded.
US President Donald Trump responded furiously, tweeting: “They are trying, and succeeding, in depreciating the Euro against the VERY strong Dollar, hurting U.S. exports.” The reason for the large swings in the Euro came as the market digested the variety of stimulus measures that were introduced, in particular there is now a two-tier system for banks to hold cash, where excess cash will be exempt from the charge.
Cable has also risen above 1.24 for the first time since 26 July. This came as it looks less likely that a no deal scenario will now happen, and The EU may be prepared to grant the UK a third delay to Brexit according to a leaked resolution seen by Business insider. We also saw weaker US consumer inflation figures than were expected which has given Sterling impetus against the dollar. US retails sales are out this afternoon and a weaker figure could see the Pound continue to tick higher.
GBPUSD is now trading comfortably above 1.24, which is a 6-week high on the pair. With so much uncertainty in the market the current level on cable presents an attractive opportunity for importers, to put it in context last week we dropped below 1.20 - one week later we are now trading above 1.24. This shows how much volatility there is in the marketplace. US retail sales will be watched closely later this afternoon to see whether 1.25 could be in sight.
We saw significant movement on GBPEUR yesterday in the aftermath of the ECB rate decision with the pair peaking at 1.1253 as the market initially traded a knee jerk reaction to the rate cut, as the day progressed it became apparent that the stimulus package was less dovish than the market was pricing in and subsequently we saw the pair drop to as low as 1.1117. This is a wide range in a short period of time and shows how much volatility and ultimately risk there continues to be in the market.
EURUSD mirrored the moves in GBPEUR, initially dropping to as low as 1.0950, but then reversed losses over the course of the day. The pair broker through 1.11 this morning but has now settled below that level. This afternoon retail sales from the US could see further movement in the pair.
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