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Rate Alert! GBP/EUR breaches 1.40

Is this the top? Will it come lower?

This week has seen GBP-EUR breaking new highs daily and placing severe pressure on UK businesses selling into the Eurozone. This year alone, the Euro has lost 15% against the Pound and in the last year the rate has moved from 1.1800 to above 1.4200.

The trend is set and now that 1.40000 has broken, the new range is from 1.4000 to 1.5000. Nearly every major institution is still forecasting a lot more pain for the Euro and given the severity of the move thus far, 1.5000 could be closer than we thought. It is important to remember that pre-credit crunch GBP-EUR used to trade comfortably around 1.50. How will this affect your business and bottom line?

Fundamental reasons for this move:

Diverging monetary policy

a. The next move from the BOE will be to raise interest rates which could be as early as Q4 this year.

b. ECB have embarked on a QE program (€1.1tr) which will weaken the currency through increased supply. There is also potential for a rate cut if deflation becomes prolonged

Greece and politics

 a. The Greek concerns have re-emerged less than two weeks after the calming news that a bridging payment would be made available. Euro officials have become frustrated with the lack of communication and action from Greece. This lack of clarity will continue to add pressure on the single currency.

b. European elections could add to further uncertainty in the region. As with the emergence of Syriza in Greece it will be interesting to see if other anti-austerity parties come to the forefront, particularly in Spain and France.

ECB’s QE program

 a. Question marks have already been raised about the size of the QE program launched by the ECB.

      i)   The FOMC QE program which ended last year equated to 25% of 2008 GDP when launched.

      ii)  The ECB QE program launched this month equates to 11.4% of 2014 GDP.

      iii) This could mean more stimulus from the ECB and therefore more pain for the Euro.

b.  Last week Draghi opened the door to extending the program before a single bond was even bought.