The pound moved back towards recent three-and-a-half year highs against the euro today as rates were cut on the Continent.
As the euro weakened in response to the European Central Bank cutting its main rate to a record low of 0.75 per cent, sterling gained a cent to €1.254 (or 79.78p to the euro) – its highest in five weeks and a fraction below the three-and-a-half year high of €1.258.
The pound was also helped by the fact that the Bank of England sprung no surprises today by announcing the expected amount of £50billion extra quantitative easing.
A higher interest rate tends to attract investor funds and therefore raise demand for a currency, and as the Bank left rates on hold at 0.5 per cent, the ECB cut narrows the gap with the UK rate.
Some currency traders had been expecting a £75billion cash injection, which would have weighed on the pound.
‘This (BoE) easing is mildly positive for sterling,’ said Paul Robinson, head of European FX research at Barclays.
‘Even though £50billion was the consensus forecast, quite a few people saw a risk of it being greater than that. Some people were thinking they might cut the actual interest rate for the first time in a long time.’
While more quantitative easing is usually seen by the market as negative for sterling, many analysts expect the pound to keep gaining against the euro as worries about Europe’s debt crisis persist.
The euro versus the pound over the last five years
Many also fear the ECB will have to loosen monetary policy either with another rate cut or some form of QE, both of which will weaken the single currency.
But as the UK economy is faring badly compared to the U.S., it is unlikely to make the same gains versus the dollar.The pound is trading at $1.55, historically a very low rate.
In addition to cutting the main refinancing rate, the ECB also surprised markets by reducing its deposit rate, which acts as a floor for the money market, to zero from 0.25 per cent.
Azad Zangana, European Economist at Schroders said, ‘While the cut in the main refinancing rate was expected, the cut to the deposit rate comes as a surprise as the bank has in the past emphasised the need to have a positive deposit rate.
‘The result has been some depreciation in the euro against the dollar and pound.
‘The cut in the ECB’s interest rates will be marginally beneficial for the Eurozone economy but by no means removes the risk of recession in the near term nor resolves the sovereign debt crisis.’
Printing money: The Bank of England sanctioned another £50bn of QE today
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