Sterling’s losses against the Euro are mainly attributed to Euro strength as opposed to GBP weakness as the Euro also gained well over 1 cent against the US dollar in afternoon trading. This was following the Bank of England’s interest rates decision in which the base rate remained at 0.5% and the bank decided against extending Quantitative Easing.
Also this morning the European Central Bank (ECB) released their latest rate decision keeping rates on hold at 1%. This, to me was the reason for the Euro strength in this afternoon’s session as many analysts had expected a 0.25% cut from Mario Draghi (head of the ECB). However in his post decision conference Mr Draghi said the ECB approved of the measures announced at the EU summit in December (in which Cameron vetoed) and suggestions were made that although the economic outlook for the euro area was described as ‘highly uncertain with large downside risks’ he suggested the implementation of the European Financial Stability Facility sooner than March.
Earlier this week GBP/EUR was trading at a 16 month high against the Euro. In the current climate I personally do not feel anyone can confidently hold their hand up and say which way this pair is heading and for this reason I feel the best way to approach the market is to look for peaks and troughs. Being close to a 16 month high suggests we are at a peak and surely represents a good time to buy?
For those waiting to see 1.25 I feel GBP/EUR is very much like an elastic band that has the potential to snap back sharply as alluded to by my colleagues post on Tuesday. The post highlighted some extraordinary statistics that in the past four years on each occasion Sterling breached the 1.20 mark, within a period of no more than four months the pound lost ground by anywhere from 4% – 15% against the single currency. For this reason anyone holding on I feel you are running a very risky strategy and I personally feel we are nearing a peak against the Euro. I would expect to see GBP/EUR back towards 1.15 within the next few months as I feel a solution is likely to be reached to the ongoing European debacle as it is too big a problem to let fail, and the underlying facts within the UK economy (low growth, rising unemployment, increased borrowing costs facts that I believe a lot of Euro buyers are neglecting) will take their toll on the Pounds value in the long run.
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