Foreign Currency Market Update – GBP / EUR Update
GBP/EUR began last week’s session at just over 1.2800 and declined to 1.2775 on Monday due to a worse-than-expected UK construction PMI result of 57.6.
Sterling’s troubles intensified on Tuesday when the latest service sector report showed that output in Britain’s dominant tertiary industries decelerated from 58.6 to 55.8 in December. Combined with disappointing manufacturing and construction PMI scores, the downbeat service sector reading suggests that British GDP growth slowed from 0.7% to 0.6% in the fourth quarter. GBP/EUR slipped below 1.2700 in response.
However, demand for the Pound triumphed over desire for the single currency on Wednesday because, for the first time in over five years, Eurozone inflation plunged into negative territory. The latest slide in global oil prices helped push the currency bloc’s CPI rate down from 0.3% to -0.2%, which was seen to greatly increase the chance of a full-scale sovereign bond buying programme from the European Central Bank.
Sterling rose back above 1.2800 on Thursday thanks to a report showing that factory output contracted -0.4% in Germany during November.
However, GBP/EUR gave back some of its gains on Friday in response to rumours that the ECB is only planning to unleash €500 billion worth of new stimulus measures. Although this may sound like an awful lot of money, analysts have suggested that around twice that much is needed to help stave off the threat of deflation. So if ECB QE is half as large as traders were prepared for then the depreciative impact on the single currency is likely to be half as strong.
This week’s economic calendar is fairly sparse. The only piece of fresh economic data that looks likely to have a lasting impact on GBP/EUR is Tuesday’s UK CPI report. British inflation is tipped to have fallen from 1.0% to 0.7% in December, therefore prompting Bank of England Governor Mark Carney to send a letter to Chancellor George Osborne explaining why the consumer price index is running at less than half the bank’s 2.0% target. However, in this climate of tumbling oil prices it will not be difficult for Mr Carney to explain the situation to Mr Osborne and it is therefore unlikely that anything will be done to weaken the Pound in attempt to spur higher inflation.
The Pound to Euro exchange rate is likely to trade around the 1.2800 mark in the build up to next week’s ECB stimulus decision and the following week’s Greek general elections.
Heads Up
Summary of major upcoming data releases that we think may move the market.