Foreign Currency Market Update – GBP / EUR Update
The Pound to Euro exchange rate rallied to a new seven-year high earlier this morning, as the European Central Bank’s expansive quantitative easing programme and the Syriza election victory weighed on sentiment towards the single currency.
Still reeling from the Swiss National Bank’s decision to stop pegging the Swiss Franc to the Euro, and therefore to stop purchasing large amounts of Euros on a daily basis, the single currency began last week’s session at around 1.3100.
GBP/EUR remained close to 1.3100 until Wednesday morning, when the latest Bank of England minutes report showed that Martin Weale and Ian McCafferty, who had voted for rate hikes at each of the last five meetings, joined the doves in voting 9-0 against raising rates in January. Citing fears of disinflation the former hawks decided that it was not the right time to start tightening monetary policy. This weighed on Sterling, bringing GBP/EUR down to 1.3050 even though labour market data came in optimistically. Unemployment tumbled to a new six-year low of 5.8% and wage growth rose from 1.4% to 1.7%.
However, the Pound jumped to a new seven-year high against the single currency on Thursday afternoon, in response to the ECB’s announcement that it would be purchasing €60 billion of Eurozone government bonds each month between now and September 2016. The larger-than-expected scheme will see the ECB pump over €1 trillion into the Eurozone bond market over the next year-and-a-half – twice as much as most market participants had priced-in. GBP/EUR rallied to 1.3220 in response to the aggressive stimulus measures, which are likely to reduce the amount of profit that foreign traders can achieve on investments denominated in Euros.
Sterling strengthened further on Friday, as British data showed that retail spending remained strong in December. Analysts had expected retail sales to contract -0.7% following the ‘Black Friday’ bumper sales bonanzas in November but the actual result saw sales increase by 0.4%, which bolstered demand for the Pound.
And Sterling pushed ahead even further on Sunday evening / Monday morning in reaction to the anti-austerity party Syriza’s victory at the Greek general election. Syriza leader Alexis Tsipras wants to renegotiate the Hellenic nation’s debt pile, something which many economists fear could lead to Greece being kicked out of the 19-nation bloc. The threat of a ‘Grexit’ helped drive GBP/EUR higher to a new seven-year high of 1.3500.
Looking ahead to this week’s economic calendar and there does not appear to be much chance for the single currency to recover. British GDP is tipped to have slowed from 0.7% to 0.6% in the fourth quarter but unless the UK growth figure comes in significantly lower-than-forecast GBP/EUR should remain above 1.3300.
Later on in the week German inflation is expected to dip below zero and Eurozone CPI is likely to slide from -0.2% to -0.5%. The region’s soft inflationary outlook is liable to reduce investors’ appetite for the single currency.
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