Last week I discussed the new forward guidance that the Bank of England and European Central Bank initiated. I said I thought it would push both currencies down. But which currency is it likely to push down more?
I think the pound. There are two reasons. One, the UK has more flexibility on monetary policy than the ECB does. Secondly, the UK has some balance of payments problems that the euro zone doesn't. But of course it all depends on whether we have another political or economic crisis in the Eurozone. If we do, then the pound will once again be seen as a "safe haven" and will probably appreciate relative to the euro.
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The ECB lacks flexibility on monetary policy for two reasons. One reason is cultural: the German influence on the ECB. Germany had a terrible experience with hyperinflation during the early 1920s and ever since has had a stable currency as a major economic goal.
When the ECB was set up, it was designed as a replacement for Germany's central bank, the Bundesbank. That's why it only has a single mandate: to keep inflation under control. Secondly, the way the ECB operates in the money markets makes quantitative easing effectively impossible, which limits what it can do. I'll explain why in a moment.