Foreign Currency Market Update – GBP / EUR Update
Sterling rallied to a six-year high of 1.2938 against the Euro last week in response to ECB stimulus and Greek election concerns, but demand for the Pound deteriorated on Friday when British manufacturing disappointed.
The single currency ran into a little bit of trouble at the start of last week’s session when, predictably, the ruling coalition party’s presidential candidate failed to obtain a majority vote in the third round of elections – thus signaling that general elections would have to be held in January. This caused jittery investors to pull out of the single currency through fear that SYRIZA, currently ahead in the polls, could win the general election and bring about a Greek exit from the Eurozone.
SYRIZA leader Alexis Tsipras doesn’t intend to take the Hellenic nation out of the 18-nation bloc but he does intend to renege on Greece’s debt obligations, which many fear could lead to Greece’s expulsion from the currency bloc. The high level of uncertainty surrounding the situation is certainly not conducive to a strong Euro.
Indeed, the mixture of Greek election jitters and bets that the European Central Bank is going to embark on a full-scale quantitative easing scheme in January helped drive Sterling to a six-year high last Friday morning. The Pound’s spike came in response to comments from ECB Chairman Mario Draghi intimating that strong stimulus measures were being prepared to tackle the heightened threat of deflation in the currency bloc.
However, a disappointing fall in UK manufacturing output from 53.3 to 52.5 was taken as a significant bearish signal later in the day on Friday. The underwhelming figure caused investors to push their Bank of England rate hike bets back into 2016 and this led to a market-wide depreciation in Sterling. GBP/EUR gave back its earlier gains and settled at 1.2780.
With both UK manufacturing and construction PMIs performing badly in December, the Pound could come under more pressure on Tuesday if the British service sector PMI also underwhelms. However, demand for the Euro could easily dip on Wednesday if the Eurozone consumer price index falls into negative territory as expected. The Bank of England monetary policy decision is likely to be a non-event.
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