Deflation and bond buying cause GBPEUR movement USD strengthens

20 May, 2015

Matthew Boyle

Yesterday was a particularly busy day for market data and unsurprisingly we saw a large amount of movement in rates. Early morning we had an ECB announcement that they will ramp up the ongoing Q.E programme over the coming months and effectively increase their bond buying scheme. As a result and as we saw when the scheme was initially announced this pushed weakness in the Euro which almost instantly lost around a cent and a half against both GBP and USD.

However this was shortly followed by another big announcement that the UK is officially in a period of deflation (-0.1%)– the first occurrence since 1959. With deflation spelling some cause for concern as effectively it encourages consumers to hold off on their spending, GBP>EUR rates quickly began to correct and within the following hours trading had returned to the same level at market open. By the end of the day’s trading however it was the pound that won the tussle, and perhaps aided by ongoing concerns over Greece had gained around half a cent against the Euro.

With the morning dominated by these two major announcements, the focus for the afternoon shifted across the pond to the U.S with the release of building permit and housing stats. Having hugely benefited from the mornings announcements which caused weakness in both the pound and the Euro, the Dollar had already gained around 1.5 cents and 1 cent against both respectively – a change to the recent trend. Positive results in their data releases helped the greenback to maintain these gains against the pound whilst against the single currency it managed to steal some more ground and by the end of the day’s trading it had gained around 1.5 cents against EUR. Certainly with the announcement about Q.E by the ECB we could now see a reversal of recent trend for EUR/USD rates, and the strengthening USD would have no doubt also aided GBP in its afternoon gains against EUR.

Today will no doubt be another interesting and a likely volatile day in the market. In the morning we the ECB non-monetary policy committee meeting, followed shortly after by the Bank of England minutes which will also show the MPC vote on interest rate vote. Further comments or hints in regard to the ECB bond scheme could certainly move rates and whilst a change in the BoE vote is fairly unlikely, the timing of an interest rate change is linked with inflation, so any change to the voting could send GBP rates wild.

The excitement doesn’t stop there as early evening the U.S release their FOMC minutes, with many watching for any further indications to the much discussed U.S interest rate hike currently suggested to happen around Q3 this year.

With the USD (albeit currently weak) seemingly in the driving seat and also having a huge impact on GBP/EUR rates, brace yourself, should there be any indication of a change to this plan we could see rates move drastically and rapidly.