Pound to Euro Rate Rises to 1.17 After EUR / USD Fall Following Fed ‘Falcon’ Message
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- GBP / EUR reference rate at publication:
- Place: 1.1700
- Bank transfers (indicative guide): 1.1380-1.1460
- Specialist money transfer rates (indicative): 1.1580-1.1607
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The euro emerges as one of the big losers in the United States of the Federal Reserve change in position on monetary policy, in particular vis-à-vis the pound sterling which reached its highest levels against the single currency since April.
At the June 16 policy meeting, the Federal Reserve (Fed) said it now plans an interest rate hike in 2023, whereas previously it only sees rates rise in 2024.
This change in expectation is seen as “hawkish” in that it means the central bank is increasingly looking to a future of higher interest rates based on current economic trends.
When a central bank makes such a change, its currency tends to rise relative to those owned by central banks which remain in their hands.
What happens at the Fed matters not only to the dollar, but to all major currencies, given that central bank policy is currently a key factor in value.
The Fed and bank of england are now expected to raise interest rates long before the European Central Bank, and that helps the pound and the dollar against the euro.
Above: GBP / EUR hit its highest level since April.
The pound-to-euro exchange rate (GBP / EUR) recovered to 1.17 within hours of the Fed’s decision, with the rise due to the falling euro-dollar exchange rate (EUR / USD ) to less than 1.20.
We are therefore witnessing a mechanical reaction from the currency markets which is helping the GBP / EUR as opposed to a real force centered on the pound, indeed there is currently very little interest in the pound both in the economic and political sphere.
Therefore, further declines in EUR / USD would be needed to pull EUR / GBP further down and thus increase the value of the pound.
Above: EUR / USD (upper strand) trails EUR / GBP (lower strand).
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Following the Fed’s move, the Dollar Index – a measure of the US currency against its most frequently traded rivals – recorded its biggest one-day gain since September 21 of last year.
This was after a majority of Fed policymakers indicated, using the dot-plot of various rate officials’ forecasts, that they might now be willing to start raising US interest rates as soon as possible. the end of 2023 rather than 2024.
The Fed’s projections indicated that any possible rate hike in 2023 could be a larger 0.50% increase in the fed funds rate from its currently unchanged range of 0.25% to 0.50%, rather than a typical increase of 0.25%.
“The market reaction has been fierce as the hawkish message came like love at first sight, propelling the dollar much higher and demolishing gold prices. The first sign that excess liquidity will be drained from the system,” says Marios Hadjikyriacos, Investment Analyst at XM.com.
Looking ahead, the next stance of the Euro-pound exchange rate may therefore depend on the short-term stance of the US dollar.
Hadjikyriacos says there is a technical element at play where the brand was positioned strongly against the dollar ahead of the midweek event and therefore some trade clearance could be underway.
Once this positioning clean-up is over, the dollar could regain its momentum.
Market positioning was sharply short before the meeting, forcing several players to hedge afterwards.
But, Hadjikyriacos says we might actually be looking at a decisive change in fortunes for the dollar.
“The question is whether this was an overreaction due to strained positioning or whether this marks the start of a lasting rally. At this point, the tea leaves indicate the latter. The game was still going to be a stronger dollar once the Fed got the normalization train rolling, but there was considerable uncertainty over the timing and pace. This move sped up the whole process, ”he says. .
GBP / EUR Forecast 2021
Period: From the second quarter of 2021
GBP / USD forecast 2021
Period: Q2 2021