Sterling gained against the euro on Thursday after ECB chief Mario Draghi painted a grim picture of the euro zone economy and said policymakers had discussed negative deposit rates, weakening the common currency. The euro fell to a session low of 80.66 pence after Draghi's comments, its largest daily drop against the pound in six weeks. It could see further losses after the European Central Bank revised down its euro zone growth expectations, with a near-term target seen at its 200-day moving average of around 80.60 pence.
The outlook for UK economy has also darkened but the Bank of England left interest rates at 0.5 percent on Thursday and kept its quantitative easing programme unchanged as expected. The euro's losses picked up after the ECB's Draghi said the bank had discussed negative deposit rates, or the rate the ECB pays commercial banks to park excess funds, at its meeting but gave little details.
Cutting the deposit rate would make the euro more attractive as the currency for carry trades, where investors sell a low-interest-bearing currency to buy a higher-yielding one such as the Australian dollar. "Clearly talk of negative interest rates revived the idea that they may go where no central bank has gone before and that had an impact on market sentiment," said Simon Derrick, head of currency research at BNY Mellon.
But Derrick said a downward revision in euro zone growth forecasts was in line with previous revisions, and was not a major surprise to the market. "It is a pretty lousy day for the euro," he added. The pound fell 0.1 percent against the dollar to $1.6085, off a one-month high of $1.6131 hit on Tuesday. Investors are worried that a grim euro zone outlook will hurt the pound, given the UK's strong trade links with the euro zone.
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