The euro to pound exchange rate is once again targeting 0.90 as the euro gained momentum, following the European Central Bank’s (ECB) increase in bond buying. Many economists had predicted a €500 billion rise, so the ECB’s €600 billion increase was very much welcomed, driving the euro to pound more than 0.5 percent higher on the day.
In normal circumstances, a central bank announcing further quantitative easing would drive a currency lower but in these unprecedented times when many economists expect the Eurozone economy to contract by 10 percent this year, this injection of stimulus is positive and has sent the euro to pound rate higher. The ECB’s bond buying programme now sits at €1.3 trillion and extends to June 2021.
ECB president Christine Lagarde said, “action had to be taken”. Lagarde also confirmed revisions to the ECB’s inflation and growth forecasts. The ECB now expects eurozone growth to contract 8.7 percent this year before bouncing back 5.2 percent in 2021. However, the ECB pointed out that eurozone growth could contract by 12.6 percent this year in a more damaging scenario. Inflation is likely to remain low for some time and way below the ECB’s 2 percent target. Even by 2022, the ECB only sees inflation running at 1.3 percent.
Yesterday’s announcement suggests the Eurozone is finally waking up to the fact that a bazooka rescue package is needed to deal with the economic consequences caused by the pandemic. Nation states are launching their own support packages and Germany’s latest €130 billion stimulus injection, announced on Wednesday, was also widely welcomed by investors and proved a platform for euro to pound to climb.
Will Europe Finally Unite Behind €750 Billion Rescue Fund?
After a slightly nervous start, Lagarde seems keen to ensure eurozone states have sufficient firepower to deal with the current pandemic and avoid any countries facing a sovereign debt crisis. Furthermore, the European Union has put forward a €750 billion recovery fund, which eurozone leaders will discuss in two weeks’ time. As the Bank of England and Federal Reserve slashed interest rates and released unprecedented stimulus packages, Europe stood still as EU heads of state could not agree on how to finance a rescue package.
Whilst all EU leaders agree that a rescue fund is needed, EU leaders have been at odds over how the bailout is funded. Italy, Spain and France proposed Coronabonds, which would see the eurozone borrow collectively, however, the northern states led by Germany are against any form of borrowing that causes debt mutualisation. If the proposed package is agreed later this month then it will be Merkel rather than Macron who has got her way.
Lagarde was also probed about the German’s supreme court ruling last month, where it was ruled that the ECB’s bond buying programme between 2015-2018 was illegal. This ruling put the Europe’s largest economy at odds with the central bank. However, Lagarde’s response yesterday was limited, only stating that she was a confident that a solution could be found.
EU Leaders Look to Boris to Break Brexit Deadlock
UK and EU Chief Brexit Negotiators, David Frost and Michel Barnier respectively, are expected to confirm later today that UK-EU trade discussions have not progressed this week. With both parties sticking to their red lines, there really is no middle ground for compromise with the current mandates.
EU leaders will meet in less than 2 weeks at the European Council meeting and review Brexit options. It is believed, EU leaders will discuss areas where they can show compromise if the UK displays the same will. EU leaders will then meet with Boris Johnson to see if they can find a way to break the deadlock.
The UK has until the end of this month to extend the transition period beyond January 2021 although the prime minister has repeatedly stated that the UK has no intention of doing this and the EU are beginning to realise this, despite recently pushing for a 2 year extension. This means the UK-EU must reach a trade agreement before the end of December, otherwise they will trade on World Trade Organisation rules.
This will leave 6 months in which to strike a trade deal with the EU, although a free trade agreement really needs to be agreed by October in order to allow time for approval. Hence, many investors are now setting their sights on October as the key month for a Brexit deal, and an autumn of euro to pound flirting with the prospect of no-deal.
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