Divergence in monetary policy stances sends the Euro lower

Enrique Díaz-Álvarez22/Sep/2015Currency Updates


Sterling suffered a modest 0.3% depreciation against the US Dollar yesterday, although faired a lot better than the Euro, with markets focusing again on the divergence in monetary policy stances between the Bank of England and the European Central Bank. The Pound subsequently rose by 0.7% versus the Euro to its highest position in a month.

There were no major economic releases in the UK yesterday, with hawkish words across the pond mostly contributing to Sterling’s decline. There were, however, some similarly hawkish words from Bank of England Deputy Governor Jon Cunliffe that mostly went under the radar. Contrary to controversial comments on Friday from chief economist Andy Haldane, Cunliffe claimed that “pretty good” economic growth would ensure that the next move in interest rates would be up, despite a lack of strong upward price pressure. Not only did he claim a lack of price pressure from the domestic economy, but that there are disinflationary pressures from abroad. This will likely weigh on the Bank of England if it persists.

This week looks set to be a quiet one as far as UK economic releases are concerned. Volatility in Sterling this week will likely depend on announcements elsewhere and shifts in expectations regarding interest rate hikes by both the Bank of England and Federal Reserve.


The Euro lost ground against the Dollar yesterday, with all of its post-FOMC gains now completely wiped out. Traders continue to bet that the ECB is primed to expand its quantitative easing program, especially since the Fed’s decision last week to leave rates unchanged. We see the chances of this as 50/50 before year-end, with it likely to send the Euro lower against its major peers. The single currency depreciated by a massive 1% yesterday, reaching a ten day low versus the Greenback.

Markets yesterday were reacting to a variety of announcements in Europe over the weekend. Firstly, the Greek snap election delivered a comprehensive victory for Alexis Tsipras’ Syriza party, which gained over 35% of all votes cast. The stability brought about by the result meant Euro volatility was muted.

Elsewhere on Saturday, the European Central Bank’s Chief Economist Peter Praet reiterated the central bank’s “readiness and decisiveness” to amplify its bond buying program should economic turbulence warrant such decisive action. Speaking in a Swiss newspaper, Praet claimed that risks to the global economy had increased significantly, although there were encouraging signs of improvement in the Eurozone, namely in Spain and Ireland.

Economic releases are at a premium in the Eurozone again today, with consumer confidence this afternoon the only major announcement. Attention will instead shift to Mario Draghi’s speech on Wednesday, with any hints on a QE expansion likely to send the Euro lower.


The US Dollar rose strongly against its major peers yesterday, buoyed primarily by expectations of a Fed rate increase in 2015 and talk of an expansion in the ECB’s QE program. The US Dollar index increased by 0.75%.

Speaking on CNBC television yesterday, Federal Reserve member James Bullard left the door open to an interest rate hike in the US next month by claiming there was “a chance” that the Fed could lift rates at its October meeting. According to Bullard, there is a “powerful case to be made” for beginning to hike rates in October and that, in line with our opinion, the time for emergency monetary policy settings in the US is over.

Meanwhile, despite not committing to a firm data, Atlanta Fed President Lockhart said he would support a rate hike at a “coming” meeting. As is our expectation, he still predicts a rate increase to come this year, with a delay in September largely a “risk management” exercise to ensure recent market volatility would not be a drag on the US economy.

A couple of second-tier announcements including the housing price index and Richmond Fed manufacturing survey could cause moderate volatility today. As with the other major economic zones, focus will likely shift to later in the week, namely Friday’s revised GDP growth figures.


Written by Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.