Euro gains as market awaits Draghi’s silver bullet
Super-Mario to the rescue? The euro has been the big winner in the past week, gaining ground against both the pound and US dollar. Oddly enough though, this isn’t because of anything that’s happened, so much as hopes regarding what might happen.
Welcome to the Pure FX account of the latest changes in the euro exchange rate. This is intended as a brief guide to movements in the euro this week, to put you in the best position for when you exchange currencies.
Changes in the exchange rate:
GBPEUR: 1.2765 to 1.2593 (-1.347%)
GBPUSD: 1.5687 to 1.5787 (+0.637%)
EURUSD: 1.2289 to 1.2508 (+1.782%)
What’s affected the rate this week
Super-Mario to the rescue? As you can see above, the euro has been the big winner in the past week, gaining ground against both the pound and US dollar.
Oddly enough though, this isn’t because of anything that’s happened, so much as hopes regarding what might happen.
In short, the market is on tenterhooks regarding a forthcoming announcement from European Central Bank president Mario Draghi, in which he’s expected to announce measures that significantly reduce the pressure on Spain and Italy.
It all started about a month ago, when Mr. Draghi declared in a speech in London, “The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”
Since then, the only thing the markets have talked about is what action the ECB might take. That now looks to be buying Spanish and Italian government bonds, to reduce borrowing costs for these countries and so enable them to reform their economies without worrying about financial pressures.
Yet, even now, the details of the central bank’s scheme are unknown. It’s hoped the ECB will make its full announcement next week, on September 6th, at its monthly meeting.
Of course, that means that though the euro is strong for the moment, it could quite easily weaken if next week the European Central Bank disappoints.
What’s going to happen next
Although market expectations for ECB action are high, there are in fact significant pressures on the central bank that limit what steps it can take.
These pressures chiefly come in the form of Jens Weidmann, the head of Germany’s central bank the Bundesbank. Mr. Weidmann opposes the ECB’s proposed bond buying scheme, arguing it comes dangerously close to illegal central bank funding of governments.
He also suggests it might lessen the resolve of Spain and Italy to reform their economies. Speaking this week, he said central bank funding “can become addictive like a drug.”
Given that, though Mr. Weidmann is unlikely to stop the ECB carrying out its plan, it could be watered down. Berenberg economist Holger Schmieding notes that the ECB may “not aim to bring yields down quite as much as Italy and Spain might like to see.”
How this affects you
There is significant potential for the euro to fall in the coming week. Its current strength is essentially built on sand foundations, with the least disappointment regarding ECB action likely to bring the whole thing tumbling down.
That could be of benefit to you if you intend to buy euros next week, as the pound reclaims ground from the common currency.
Find out more: To find out more about what’s affecting your foreign exchange transfers, simply fill in your details into the form below. I’d be delighted to answer any questions you may have.
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Pure FXPeter Lavelle is an economist at foreign exchange broker Pure FX. For a free no-obligation quote regarding changing currencies, get in touch at foreign exchange specialist Pure FX.
Copyright: Peter Lavelle, Pure FX
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Tags: currencies, ecb, euro crisis, euro to usd, eurozone, foreign exchange, gbpeur, mario draghi, pound to euro, purefx