Eight-Month Best for GBP/EUR Exchange Rate, but European Central Bank President Strengthens Euro with Lack of Dovish Comments
After a sharp rise last Monday, the GBP/EUR exchange rate edged lower again on Tuesday as a strong uptick in Eurozone business sentiment overshadowed a significantly smaller budget deficit for the UK government during December.
Public borrowing was expected to clock in at -£4.3 billion after November’s -£6.6 billion overspend, but instead the shortfall shrank to just -£1 billion thanks to record-high VAT receipts and an unexpectedly-large credit from the European Union.
The Pound was able to recover and race higher on Wednesday thanks to a stellar employment figure and a surprise uptick in the pace of average weekly earnings.
The number of people employed in the three months to November increased by 102,000 - economists had predicted a -12,000 drop - and weekly earnings excluding bonuses grew 2.4% over the same period and year-on-year, compared to expectations of a hold at 2.3%.
Taken together, these two pieces of forecast-beating data were seen as strong justifications for another interest rate hike from the Bank of England (BoE) this year, causing traders to buy the Pound.
GBP/EUR Exchange Rate Undermined as ECB President Mario Draghi Fails to Display Typical Dovish Attitude in Post-meeting Presser
Pound strength was quickly undermined on Thursday, however, which saw the GBP/EUR exchange rate tumbling from the eight-month high struck the day before after the European Central Bank (ECB) announced its latest monetary policy decisions.
The Governing Council made no changes to its current stimulus package, but a press conference with President Mario Draghi saw demand for the Euro surge.
Draghi is traditionally dovish in these briefings and has a knack of driving the Euro lower, even when the outcome of the meeting itself has been upbeat.
However, this time he failed to offer anything particularly downbeat, suggesting that perhaps the Eurozone’s chief policy setter has realised he can no longer resist calls for tighter monetary policy from other members the Governing Council.
At one point Draghi commented: ‘The strong cyclical momentum, the ongoing reduction of economic slack, and increasing capacity to utilization strengthened further our confidence that inflation will converge towards our inflation aim of below but close to 2 percent.’
His lack of pessimism did much to improve the outlook on monetary policy this year.
Pound Sterling Unable to Hold End-of-Week Gains versus Euro; Exchange Rate Falls after GDP Data Underwhelms Markets
Although the Pound Sterling to Euro exchange rate quickly rebounded on Friday morning, it spent the rest of the day surrendering these gains once again.
UK fourth-quarter GDP figures disappointed, even though the quarter-on-quarter and annualised figures both came in 10 basis points higher than expected, printing at 0.5% and 1.5% respectively.
Regardless of this, the UK economy still put in its worst performance since 2012 and the Office for National Statistics (ONS) noted that ‘The dominant services sector, driven by business services and finance, increased by 0.6% compared with the previous quarter, although the longer-term trend continues to show a weakening in services growth.’
This allowed the Euro to climb, despite its weakness elsewhere after Mario Draghi warned US Treasury officials not to attempt to talk the US Dollar lower, sparking market fears of a currency war.
He was responding to comments from US Treasury Secretary Steven Mnuchin at the World Economic Forum (WEF) event in Davos, Switzerland, who said that a weaker US Dollar was good for trade, prompting investors to sell out of USD.
Volatile Week Forecast for GBP/EUR Exchange Rate as Carney Appears Before Lords Economic Committee and Eurozone CPI Data Gets Published
UK economic data is sparse but impactful this week, with the first development of note being the appearance of BoE Governor Mark Carney before lawmakers on Tuesday afternoon.
This is an annual appearance before the Lords Economic Affairs Committee, in which Carney will be questioned regarding Brexit and the state of the economy.
The Bank of England will soon enter a blackout period before its next monetary policy meeting in February, meaning Carney’s testimony could be the last chance markets will get to gain some insight into his outlook for monetary policy over the coming year. Signs of confidence from the governor would push Sterling higher.
Thursday sees the release of the Markit manufacturing PMI for January, with the construction index following on Friday.
This is the first chance for economists to get a glimpse at the state of the UK economy at the start of the New Year; signs of weakness here could soften the 2018 outlook, while strength would help to boost the GBP/EUR exchange rate.
Tuesday and Wednesday are likely to be the busiest days in terms of Euro volatility. Eurozone fourth-quarter GDP figures and the German consumer price index data is set for release on Tuesday, while German unemployment and Eurozone consumer price figures follow on Wednesday.