The U.S. and Britain are recuperating from their recent losses and the Eurozone is likewise on the road of improving and a European Central Bank meeting in the coming weeks would possibly lead to more bad news for the euro.
The club med nations, as the southern states are so called dubbed, are still in the verge of their struggle. Nearly one in four people are unemployed in either Greece or Spain with the crisis being highlighted as natural flaws in the single currency which has become the sick man of the major western economies, both the U.S. and the U.K. are pretty much showing signs of greener indications of a recovering economy.
The institutional structure supporting the single currency is incomplete which basically explains the reason behind the UCB’s less aggressive nature with monetary policy having more bearing than its counterparts in the abovementioned economies.
This in turn might change inadvertently and is widely expected that the ECB will be making budget cuts of 0.1pc from 0.25 and take other steps to encourage the economy hopefully when it will meet in the coming weeks.
These approaches might include negative deposit rates which will be increasing the money supply along with long term-financing operation to bolster lending although the last time the banks did so was to purchase government banks or quantitative easing. Moreover, any of the above mentioned measures could potentially negate the ongoing effects on the euro.
The ECB rate cut will only be limited and the pound may slip on a meagre level defiantly on a much shorter scale than it is expected in correcting itself towards €1.21 from €1.23 before moving towards the €1.25-1.26 in the second half of this year.
Many experts agree as it is expected that the incumbent ECB chairman is poised to cut both interest and deposit rates and provide with new measures in liquidity. Moreover, these are considered to have negative repercussions for the euro and it therefore stands as the primary reason that would disappoint the ECB’s expectations. If so then the euro may well rise within the coming weeks.
However, there are also a fair share of those who are sceptical regarding the ECB chairman’s move. It is likely that the same will have to take more precarious and unprecedented steps to assist the region. Should the ECB chairman take the markets by surprise and chooses a programme of full blown QE, there should be a weakening effect of the euro that would follow.
It is not simply what the Eurozone does that will affect the exchange rate but more particularly what is presently happening in the British economy at present. With the deviating outlook of the Bank of England and the ECB, this should bode particularly well for sterling in the course of this year and as long as the Bank of England rate hike will be betting on hikes to expand then it is possibly likely that there could be a breach in the GBP/EUR breach by an estimated 1.25 handle by the end of the year.
However, there is still a resounding danger that awaits the Eurozone banks. With the ongoing stress testing of the banks currently underway, the same are considered to be experts in hiding their debts but with the banking responsibility being passed to the ECB it is now repudiating to take full responsibility until all the banks have been checked and given the okay signal.
Still the stress tests are still undisclosed, but there’s an expectation that lots of new money will be needed to reinvest a good number of banks which could go to the wall and there also lies the possibility of a cascading effect if the chief banks go bankrupt. The only assurance will be is that the euro will continue to weaken just as the sterling did nearly seven years ago.