As mentioned in the GBP market report, sterling has risen in value versus the euro so far this week. In part, this is because the financial markets feel more confident that there won’t be a ‘No Deal’ Brexit, and because of the UK’s upbeat economic performance.
In addition, it may be because the European Central Bank (ECB) has cut interest rates, and extended its extraordinary monetary stimulus, called Quantitative Easing (QE), to prop up the ailing Eurozone economy.
This Thursday 12th, the Eurozone’s central bank revealed that it was cutting its deposit rate, which it charges commercial banks to park money at the ECB overnight, by -0.1% to a new all-time low of -0.5%. This encourages the commercial banks to lend this money to households and businesses, to earn profits, instead of parking the funds at the ECB, where it’s making a loss.
However, because this measure makes buying EUR-denominated assets less profitable, it simultaneously devalues the euro.
Yesterday, the ECB announced that it was restarting QE, the unconventional monetary easing scheme in which the central bank electronically prints vast sums of euros. The ECB revealed that it would begin injecting €20 billion a month into the Eurozone’s financial system, having previously ended this scheme in December 2018, after injecting trillions over the last few years.
The objective of QE is to lower Eurozone businesses’ and governments’ borrowing costs, to encourage them to take out loans and invest, yet QE historically tends to weaken the euro too.
The ECB has cut interest rates and extended QE this week, because the Eurozone’s economy is showing increasing signs of weakness. For instance, in recent weeks we’ve learnt that Germany’s GDP shrank by -0.1% in Q2, between April and June, in part because of the USA’s and China’s trade war. Since then, Germany’s manufacturing performance has continued to disappoint. This week it was revealed that the Eurozone’s industrial production fell by -2.0% in July year-on-year, well below economists’ forecasts for -1.3%. We’ll see if the ECB’s measures can succeed in shoring up the Eurozone’s GDP growth, and their effect on the euro, in the coming weeks and months.
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