The EUR saw its value weaken off against both GBP and USD during Tuesday’s trading, following a speech by European Central Bank (ECB) President Mario Draghi.

Currency Pair% Change (Month)Difference on £200,000

Draghi’s tone throughout his address was particularly dovish, with the EUR being negatively affected as a result.

Whilst the markets were not anticipating a particularly upbeat speech, investors may have not foreseen the Central Bank President’s view point that further monetary stimulus and an interest rate cut were becoming “increasingly likely”. He felt these tools could well be necessary to help combat the current stagnation and downturn in the Eurozone economy.

Draghi also cited the ECB’s concerns over the current inflation levels, which fell again yesterday, as another reason a rate cut could be required.

Is the Eurozone set for period of Japanification?

Is the Eurozone set for period of “Japanification”?

If the ECB were to cut their base rate again it would take the Eurozone bloc into deflationary situation, with the current rate standing at 0%. This would cause a situation similar to Japan’s, with investors calling the potential rate cuts a certain path to “Japanification”, which is an inescapable period of stagnant growth and ultralow interest rates.

These negative developments immediately caused a sell-off of EUR currency positions, which in turn helped boost Sterling, where the interbank rate had fallen close to a six-month low against the EUR during early morning trading yesterday.

The pound managed to claw back over half a cent against its euro counterpart, with GBP/EUR interbank rates trading around 1.12 by the close of European trading.

Whilst yesterday’s downturn for the EUR may not continue at a great pace, given the current instabilities surrounding the UK economy due to Brexit, it is clear that both the UK & Eurozone economies are currently facing a unique set of economic and political issues.

If these negative variables manifest themselves as deeper fiscal problems, they could impact both currencies' value over the coming months. 


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