The British Pound has made good gains vs. the Euro (EURGBP) in the last few weeks as it looks like a no-deal Brexit has been adverted, and instead the next potential exit day is January 31, 2020. The British pound could on the heels of Brexit risk fading to continue to gain vs. the Euro, however, EURGBP volatility is set to be high today, as the European central bank (ECB) will unveil their next steps.
Ahead of the ECB rate meeting, the EURGBP was trading above the July 25 low of 0.8891, and it looks like the rise above the 2017 high of 0.9310 was what we call a false breakout. The markets are anticipating the European central bank will ease monetary policy, and this could send the Euro lower. However, if they fail to meet the expectations of the market it could send the Euro higher. In general, the ECB has shown strong reluctance to make major changes to their monetary policy in the last few months, as seen in the latest rate meeting with Mario Draghi backtracked on a very dovish statement.
If the ECB fails to meet the economist expectations the EURGBP could rise to the 0.90 level followed by 0.91. However, if they meet or exceed expectations EURGBP could slide below the July 25 low of 0.8891, and the price could reach the next support level at the April 2019 high of 0.8683.
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What are the ECB Rate Meeting Expectations?
Economists are projecting the European central bank will reduce interest rates by -20 bps to negative 60 bps. The negative interest rates mean that banks need to pay for the privilege to deposit money with the ECB. The ECB’s rationale behind the move it to stimulate spending and reduce the debt service burden of European consumers and corporations by further penalizing banks for storing their excess money at the ECB.
As the ECB main interest-rate only influences short-term interest rates, they might also introduce a new asset purchases program (quantitative easing), to better manage the longer-term interest rate. The markets are currently projecting a QE program of around 30bn Euros per month, for the next twelve months. If the central bank fails to meet expectations, we could see the Euro gain, while if they exceed market expectations, the Euro could gain.