Foreign Currency Market Update – GBP / EUR Update
The Pound drifted lower by around a cent over the course of last week as trading conditions remained volatile in the aftermath of the Greek election.
GBP/EUR touched a near seven-year high of 1.3440 last Monday in reaction to comments from Bank of England policymaker Kristin Forbes suggesting that interest rates may rise sooner-than-expected if the recent trend of falling consumer prices begins to reverse.
But demand for Sterling dipped on Tuesday morning when British GDP growth came in a little bit lower than the median market forecast. Analysts had been primed for a quarterly growth score of 0.6%, but the actual result signalled that domestic output slowed from 0.7% to 0.5% in the fourth quarter. The softer-than-anticipated ecostat brought the Pound to Euro exchange rate lower to 1.3365.
GBP/EUR traded higher on Wednesday as markets took a sizable chunk out of the Greek stock market, which fuelled fears that the Hellenic nation could be forced to leave the currency bloc. Greek banking stocks declined -25%, the benchmark stock index was down -9% and the yield on Greek 10-year government bonds rose to 13.5%.
Strangely, the Pound weakened by around -1.5 cents through Thursday and Friday even though data showed that disinflation was spreading throughout the 19-nation bloc. German CPI struck a five-year low of -0.3%, Eurozone inflation sunk to a five-year low of -0.6% and the core Eurozone consumer price index plunged to an all-time low of 0.5%.
The single currency remained remarkably resilient to the soft inflation data because traders do not expect the European Central Bank to inject any further stimulus measures into the currency bloc for a very long time. Whether the ECB’s latest QE programme will be enough to spur inflation in the bloc remains to be seen, but it is unlikely that policymakers will loosen policy further until the latest easing measures have had a chance to work their way through the economy.
Earlier this morning UK manufacturing data printed a little bit better-than-anticipated, at 53.0, and on Wednesday the British service sector PMI is set to rise from 55.8 to 56.3. The upbeat domestic ecostats could give the Pound a bit of a boost ahead of Thursday’s BoE interest rate announcement. The UK central bank is almost definitely going to leave rates on hold at 0.50% and investors are almost definitely going to continue trading as if nothing had been announced.
The Pound to Euro exchange rate should trade close to 1.3300 for the majority of the week. That being said, if Greece’s new Syriza government runs into trouble with EU finance ministers there is potential for Sterling to strengthen.
Heads Up
Summary of major upcoming data releases that we think may move the market.