Foreign Currency Market Update – GBP / EUR Update
The Pound surged to a fresh seven-year high against the Euro last week in response to a shock announcement from the Swiss National Bank, which some have described as the single biggest un-telegraphed foreign exchange event in history.
Amid a backdrop of European Central Bank stimulus fears and ‘Grexit’ concerns, GBP/EUR began last week’s session by rising from 1.2780 to 1.2820.
Surprisingly, the Pound continued to garner support on Tuesday morning, even though British inflation was reported to have fallen to its lowest level since the year 2000. The Office for National Statistics (ONS) announced that UK CPI halved from 1.0% to 0.5% in the final month of 2014 due to the collapse in global oil prices and a spate of supermarket price wars. GBP/EUR ticked higher to 1.2880 because technical signals continued to favour strength in the Pound.
Sterling’s purple patch against the single currency continued on Wednesday when a ruling from the European Court of Justice appeared to pave the way for the ECB to go ahead and start purchasing sovereign Eurozone bonds. The announcement helped the Pound overcome the 1.2900 barrier.
However, the real excitement took place on Thursday, when, without warning, the Swiss National Bank announced that it was no longer going to maintain its 1.20 CHF/EUR floor – in other words that it was going to stop buying Euros to keep the value of the Swiss Franc down. The news shook financial markets like an earthquake. The Franc rallied by over 30% against the Euro almost instantly, which gave way to massive currency moves across the board. With the biggest daily Euro buyer no longer a Euro buyer, the single currency found itself weakening against all of the majors. EUR/USD hit an 11-year low and the Pound to Euro exchange rate jumped to a seven-year high of 1.3100.
The main reason for the mass exodus of funds from the Eurozone following the shock SNB announcement was the realisation that the central bank will no longer be purchasing huge quantities of Euros, but the timing of the SNB’s decision was also seen as a sign that the ECB is on the verge of announcing a quantitative easing scheme.
So, with the Pound over two cents better off than it was just seven days ago, is there potential for further Sterling / Euro gains? The answer is yes and no. British unemployment is tipped to dip to a new six-year low of 5.9% on Wednesday and average wages are expected to improve from 1.4% to 1.7%, and both prints could push Sterling higher.
However, ECB QE expectations have never been higher. If Mario Draghi fails to live up to these expectations then the single currency could rally in response. If Draghi releases concrete details as to the size and scale of the proposed bond-buying programme, with a defined start date, then demand for GBP/EUR could swell. On the other hand, if the potential QE announcement lacks details, or underwhelms analysts’ expectations in terms of size, then we could see the Euro recover some of its recent steep losses against Sterling.
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Summary of major upcoming data releases that we think may move the market.