Euro Bullish as Draghi Goes on the Attack
Investors have been taken aback by the latest speech from Mario Draghi. While reiterating the fact that the European Central Bank (ECB) plans to continue with its current plans of stimulus, Draghi provided a robust defence of his policy decisions, seemingly speaking directly to his critics.
As a result of his confidence, the Euro is currently trending up.
Credit Suisse: UK would be sent into Snap Recession by ‘Brexit’
According to the Swiss bank Credit Suisse, leaving the European Union would result in a short-term drop in GDP of between 1% and 2% as business confidence, investment and hiring dropped. This in turn would lower wages, weaken the Pound and soften growth overall over the long-term. The bank also predicts that a unique arrangement would be negotiated for the UK, rather than the implementation of an existing model, involving free trade for goods, while services would be restricted.
Industrial Orders Fall but Business Pessimism Decreases
Factory orders have stabilised but not recovered, according to the latest Quarterly Industrial Trends Survey by the Confederation of British Industry (CBI). 4% more UK businesses saw new orders decrease than increase, a better net balance than the previous figure of -7 and lower than the -10 forecast. While optimism remained negative, the index did jump up from -12 to -4, close to positive territory.
Pound Sterling (GBP) is experiencing a mixed start to the week, while the Euro (EUR) is making more consistent advances. The Pound is harmed by George Osborne’s ‘cheap’ tax deal with Google, while the common currency is strong ahead of a speech today by European Central Bank (ECB) President Mario Draghi. Investors are hoping he will deliver more hints over the potential for additional stimulus measures.
Pound Sterling to Euro (GBP/EUR) Soft as Google and Osborne Agree £130 Million Tax Deal
After last week’s positive borrowing figures showed that George Osborne still has a chance to bring the UK deficit down to his target of £68.9 billion, the Chancellor is now faced with negative press. As part of the government’s crackdown on tax avoidance, the Chancellor has agreed a repayment deal with Google which will see the search giant repay £130 million on top of the existing tax it has paid in the UK, totalling £70 million. However, critics do not agree with Osborne that ‘this is a major success of our tax policy.’
Experts have worked out that Google effectively pays tax at a rate of 2.77%, compared to the 20% corporation tax paid by UK businesses, as the company books advertising deals through its Ireland-based international headquarters. The additional payment, which is a back tax payment covering a ten-year period, takes Google’s total tax contribution up to £200 million: the amount one expert claims the company should be paying per year. It is estimated that the company has made profits of £7.2 billion in the UK, which critics argue means Osborne has let the company off with over £1.4 billion of avoided tax payments.
George Osborne is due to discuss similar repayments with Amazon and Facebook. The markets are worried that similar deals will be struck, effectively robbing the UK of billions of Pounds in potential tax revenue during January, which is a key month in terms of the deficit as the rate of government borrowing will be determined by the amount of money brought in by tax receipts. The Chancellor continues to come under fire from the deal, with Conservative MPs including Boris Johnson voicing their concerns and a No. 10 spokesman refusing to reiterate Osborne’s claim that the deal was ‘victory’ for the government.
The Pound Sterling to Euro (GBP/EUR) exchange rate is currently trading in the region of 1.3174.
Euro to Pound Sterling (EUR/GBP) Exchange Rate Bullish on Draghi Hopes
The Euro is performing well today ahead of a speech by Mario Draghi which could help give traders an indication of how the ECB plans to act in the future. The President of the ECB has already hinted that stimulus measures would be reviewed in March, which many believe means that quantitative easing will be increased from €60 billion per month.
With the focus on Draghi, a mixed bag of Eurozone data releases have had little impact upon EUR/GBP. The IFO Business Climate and Expectations surveys have shown a larger-than-expected drop in confidence, although sentiment towards the current conditions did not fall as far as anticipated.
The EUR/GBP exchange rate is currently trading between 0.7551 and 0.7610.
Pound Sterling to Euro (GBP/EUR) Exchange Rate Forecast: Mario Draghi in Focus
The markets will be hoping that Draghi will deliver more stimulus hints when he speaks in Frankfurt later today. However, it is likely that they will take his comments lightly after the market volatility caused in December when he delivered no change to monetary policy save a -0.1% cut to the deposit rate, despite have spent the preceding weeks suggesting additional stimulus measures were on the way.
The only data left for the UK is from the Confederation of British Industry (CBI), including Trends Total Orders, Trends Selling Prices and the Business Optimism survey.
The Pound Sterling to Euro (GBP/EUR) exchange rate is currently trading between 1.3134 and 1.3239.