The Pound to Euro exchange rate (GBP/EUR) jumped higher by around half a cent to a daily high of 1.1903 yesterday as ECB President Mario Draghi stated that the European Central Bank is prepared to lower interest rates further in order to support the flagging Eurozone economy:
“We will look at all the data on the Eurozone economy in the coming weeks and if necessary we stand ready to act again”.
Draghi’s comments reiterated the stance from last Thursday’s ECB policy statement, in which the mention of negative deposit rates sent the Euro plummeting lower against the majority of its currency peers.
On Friday ECB Governing Council member Ewald Nowotny attempted to play down the significance of negative deposit rates, and even refuted the likelihood of such measures in the immediate future:
“Markets have over-interpreted the discussion. Of course, this is one of many options. But it is not an option that is relevant in the near future and it would need many aspects to analyse…side effects and psychological effects. So, this is nothing that is of short-term relevance.”
The Euro rallied by around 0.3 cents against the US Dollar (EUR/USD) in response to Nowotny’s comments on Friday, but sunk by -0.4 cents when Draghi sounded the negative deposit rate alarm once more yesterday afternoon. The hint of discord between the ECB Chief and his fellow policymakers did little to improve confidence in the Central Bank’s ability to drag the currency bloc out of recession.
Chris Williamson of Markit Economics questioned the efficacy of the ECB’s latest monetary policy:
“The ECB has responded to the crisis by cutting interest rates to their lowest ever, but it seems difficult to believe that a mere 25 basis point cut from an already low level will have a material impact on an economy that is contracting so sharply”.
Williamson’s comments came as Markit released a set of slightly upgraded Eurozone PMI results. The German Services index was revised higher from 49.2 to 49.6, and the Composite Eurozone PMI was upwardly revised from 46.5 to 46.9. Although the prints were a move in the right direction, the actual results still pointed towards weak economic performance in the currency bloc at the start of the second quarter.
In other European news, the Eurozone Retail Sales index shrunk by -0.1% in March, to a dreadful year-on-year score of -2.4%. With Unemployment at an all-time record high of 12.1%, cash-strapped Europeans cut down particularly hard on purchases of computers and clothes. The ever-growing string of soft Eurozone data backed-up the European Commission’s decision to cut its 2013 growth forecast from -0.3% to -0.4% last week.
The single currency received some temporary support last Friday as the US Non-farm Payroll report printed at a stronger-than-anticipated score of 165,000. Additionally the previous two months’ scores were revised higher by a sum of 114,000, which boosted demand for riskier currencies such as the Euro. However, the Sterling to Euro exchange rate (GBP/EUR) was largely unmoved at the end of the week as strong UK Service Sector data showed an improvement of 52.9. The 8-month high score supported the theory that Britain could continue to grow at a modest pace during the first half of 2013.
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