The risk aversion theme continued in March as anxiety towards a potential Brexit continued to rise. Weaker economic data also played a major role in the decline of the Pound which was one of the worst performing currencies in March. The Euro on the other hand, continued its path higher much to the surprise of the market after the much anticipated ECB meeting. Sterling Euro is still within a defined downtrend and has effortlessly broken through key technical levels pushing towards a new 15 month low.
At the European Central Bank meeting, President Draghi went above and beyond the markets expectations by unveiling a drastic stimulus package. This package included expanding the quantitative easing programme from 60 to 80 Billion which now includes high quality corporate bonds, incentives for banks to increase lending, which means in effect the ECB will be paying the banks to borrow, and further interest rate cuts. Draghi also sharply downgraded inflation and growth forecasts for 2016 and 2017.
The ECB cut the refinancing rate by 5 basis points to 0% and the deposit rate by 10 basis points to minus .4 % which was widely expected, however it was a late comment in the press conference which the market became fixated on. President Draghi added his concern to the growing unease about negative interest rates among top central bankers. He alluded to the fact that they did not anticipate pushing rates deeper into negative territory partly because of the impact it has on the banks. In other words they have either played their last hand or it was sign of a recalibration of its armoury switching to reinforcing the Eurozone economy and less on weakening the currency. These comments did not have the desired effect the ECB would have wanted as the Euro soared and European stocks tumbled heavily.
Financial stability in the UK has deteriorated further in March as global headwinds have increased, while domestic risks have increased due to the upcoming referendum. The Bank of England weighed in on the closely fought campaign as they asserted the referendum posed the most significant near term domestic risk to financial stability which had the potential to drive up interest rates for a wide range of assets, if Britain ended its 43-year relationship with the EU. The prolonged uncertainty on the final outcome of the referendum has undermined a smooth recovery by crushing UK consumer and business sentiment. This could potentially persuade UK households and companies to delay spending decisions until after the 23rd June which would, of course, weigh on growth in the short term.
For Euro buyers
Depending on your time frame and how optimistic you are that Britain will stay in the EU, should help you form your decision. Short term or pre referendum, Sterling Euro would appear that it is moving in one direction and that is lower, so look to buy on any rallies as they are likely to be short-lived. For Long Term buyers it depends on what you think the outcome of the referendum will be. If you are optimistic that the UK will stay in, then you should expect a spike in your favour however the question is where will the reversal base from. Either way, with the uncertainty anything can happen so it is essential to cover some of risk around the current levels.
For Euro sellers
On a technical and fundamental basis momentum is firmly to the downside. With the referendum still over two months away, you can afford to be optimistic about targeting lower levels. It is important to reduce your exposure on the way down as it may only take one opinion poll for a reversal.
Euro Research Report by Denzil Rickerby