The general trends that have been driving financial markets of late look set to continue, and I do not expect any major shift for the Pound. The biggest event this week in my opinion, looks like the Jackson Hole Symposium which runs from Thursday to Saturday in Wyoming, USA. This meeting of central bankers could be very important, as financial markets are watching closely for comments that offer clues on future policy. By taking cues from these speeches, we could see investors shifting funds around which could trigger movements on the currency market.
Mario Draghi’s speech could prove very interesting. The President of the European Central Bank (ECB) has been talking about scaling back the current Quantitative Easing (QE) program lately. QE serves to weaken the currency concerned, and the program which has been in place since 2015 has really helped the Eurozone to recover.
Unemployment has fallen, Inflation has risen, European stock markets have all risen and the Eurozone is growing at 0.6% overall compared to the 0.3% growth for the UK. There is a growing expectation that Mario Draghi will turn off the QE taps in the future, the question is when.
When this happens it is likely to cause a big shock to the financial markets which could result in large swings in exchange rates., The recent strengthening of the Euro is also partly due to this belief that the Euro will be stronger in the long run. However, only last week there was a mild suggestion from the ECB that the Euro might have strengthened too much. It is not in the Eurozone’s interest to have a strong Euro as it makes exporting their products more expensive. This could further hamper the economic recovery, which is still delicate in many respects.
When the United States started to ‘taper’ their QE program back in 2014, it caused some big swings on the US Dollar. Markets which were previously expecting a stronger currency actually became concerned at how it would influence the economy moving forward. On paper the economics seem to suggest that the ECB will scale back current QE measures, which would strengthen the Euro. However, in practice a strong Euro is not necessarily desirable; some commentators have even delicately suggested that more QE might be necessary longer term.
The Jackson Hole Symposium is a key date on the economic calendar. Because it is presented as an opportunity for open and free thought over economic plans, it allows these important actors on the financial stage to speak more freely. In this environment Mario Draghi might well give an idea of his personal views on the situation which could result in some unexpected currency movement.
In the long term, the Eurozone still has numerous challenges including the issues concerning Greek debt and Italian banks which for now has been swept under the carpet. With exchange rates and financial markets, it if often the case thatwhen everything appears to be headed in one direction and there is no predicted change, that something unexpected rears its head and changes the picture.
Mario Draghi’s speech this week certainly has the potential to move exchange rates, and even if we don’t see any change this week, the QE tapering issue for the ECB is something of vital importance for Euro buyers and sellers.
If you need to buy Pounds with Euros then you are currently looking at some of the best rates in 7 years. €100,000 sold today compared to the worst rates of 2017 would buy you £7500 more in your pocket. Such an improvement is quite phenomenal, so the opportunity for Euro sellers is currently a very good one. If you need to buy Euros with Pounds, the rate is painful in many respects, it has become even more expensive in recent weeks and this could easily lead to higher costs in the future. If you need to buy Euros with Pounds you are effectively holding out for a surprise which may or may not happen. Of course eventually the Pound will rise against the Euro but waiting on that could prove very expensive as we don’t know when this will happen.
With many investment banks now grabbing headlines talking about parity on the GBP/EUR rate there could be more pain for Euro buyers, and more good times for Euro sellers to come.
I believe that we will now see some kind of shift in sentiment, as investors’ previous confidence in the Euro begins to fade. Friday may or may not be the trigger for exchange rate volatility, but sooner or later clients looking to buy or sell the Euro will be talking more and more about the ECB taper.
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