Joshua Mahony, Market Analyst for IG Index, joined Zak Mir and Bill Hubard on the Tip TV Finance Show to discuss the policy divergence between the BoE/Fed and the ECB, plus the effects on the EUR/GBP and the EUR/USD.
Market Overview
Mahony outlined that expectations are moving towards an ECB move in December, and he added that oil prices are still very low, so it won’t be long before they are factored out of inflation figures, which may affect Draghi’s decision in December. Mahony also commented on Volkswagen, who faced another blow yesterday, and he continued that the damage to VW’s credibility has seen selling across the board and a general loss of credibility for German companies.
EUR/GBP benefiting from divergence
Mahony commented that the pair before the BoE ‘Super Thursday’ was down 4%, and he added that the divergence between the ECB and BoE makes this trade more straight forward. He highlighted that that Draghi is hinting at revising policy which makes action from the ECB more likely in the near future, meanwhile, the BoE is moving towards a more hawkish stance following strong services and manufacturing PMI figures, but are still likely to wait for the Federal Reserve to move before Carney thinks about a rate hike.
Not unordinary lows for the EUR/USD
Mahony believed that the BoE will reap the benefits of a cheaper GBP against the USD if the Fed do indeed hike interest rates in December, before the Bank of England eventually follows suit later in the first half of 2016. He continued to show that the EUR/USD isn’t at incredibly low levels, highlighting a chart which spans back to 1985, which also portrayed that the sell-off was less dramatic than first thought. He concluded that if the pair breaks below the 1.0808 level, the EUR/USD could fall to 1.04 and put parity talks back on the table.
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