This week’s headlines were dominated by the SNB’s surprise announcement to abandon its EUR/CHF floor at 1.20. The central bank announced that it is cutting interest rates on deposits to -0.75% and moving the target range for three month Libor to between -1.25% and -0.25%.
The CHF gapped higher by more than 40% and EUR/CHF fell to a low of .8585 on the news. After the panic and volatility subsided however, it pushed back higher towards and through 1.10. As EUR/CHF gapped lower, EUR/USD also naturally slumped and ended up falling to a low of 1.1615. The SNB has been a big buyer of EUR/CHF in the past but, without this demand now, there is potential for further losses in EUR/USD over the coming days particularly in the run up to the ECB’s monetary policy announcement next week.
By Alex Edwards at UKForex, an international money transfer service
It’s also possible for the SNB to intervene to stabilise the EUR/CHF over coming weeks, especially given that rate cuts and a higher CHF make the currency less attractive to foreign investors. No doubt the markets will remain on high alert because of this. The announcement didn’t have too much of a major impact on GBP/USD, although it did push gradually higher as the associated sell-off in EUR/GBP supported bids in cable.
In other news this week, the pound got off to a soft start on news that the UK drug firm Shire was set to buy a US rival for $5.2 billion, but found support later in the week on the back of UK inflation numbers. Official figures showed UK inflation fell to its lowest level since May 2000. Annualised consumer price index for December fell to 0.5% vs 1% in November while monthly consumer prices were unchanged.
Economists had expected a fall to 0.7% in annual figures but were predicting a slight uptick of 0.1% from the previous month. The news saw the pair fall from 1.5190 to 1.5080 before staging a recovery of almost a cent through the rest of the morning on Tuesday. While the fall in CPI does not make for pleasant reading, Bank of England Governor Mark Carney and the Treasury were quick to point out that core CPI numbers, excluding seasonal volatility, remain stable and therefore present no serious threat of deflation.
Next week, the focus will be on any further follow through from the SNB decision. The ECB monetary policy announcement is also due and investors are now extremely confident that the central bank will announce a government bond-buying programme in an attempt to bring the eurozone back out of deflation and stimulate the economy.
If the ECB does not announce such a policy, it will come as a big surprise to investors and will likely see the single currency rebound, but either way there’s certain to be volatility around the announcement as the size and method of any such QE programme remains unclear at this stage. Draghi’s accompanying press conference and statement will obviously be important but, up until that point, traders will no doubt be cautious in their approach. However, given what happened last week, don’t expect EUR/USD to trade a narrow range.