Foreign Currency Market Update – GBP / EUR Update
The Pound to Euro exchange rate rallied by around two cents last week as tensions between the new Greek government and its creditors fuelled ‘Grexit’ fears.
However, Sterling began the week by falling half a cent from 1.3310 to 1.3250 on Monday in reaction to news that British Chancellor George Osborne held amiable talks with Greek finance minister Yanis Varoufakis. The upbeat outcome of this particular meeting appeared to suggest that Syriza may be willing to compromise on its plan to make substantial cuts to Greece’s debt pile. British manufacturing data printed better-than-expected at 53.0 but the encouraging PMI result was overshadowed by the Greek news.
The Euro rallied by a further 50 pips to take the GBP/EUR pairing to a weekly low of 1.3200 on Tuesday as Syriza announced plans to reshuffle its bet pile, rather than write it off. The proposal was seen as a sign of compromise from the anti-austerity party and therefore as a constructive step in the debt renegotiation process. Again, optimism regarding the Greek situation was enough to outweigh a positive UK PMI report. This time it was the construction sector that outperformed analysts’ expectations with a sturdy score of 59.1, up from 57.6.
However, demand for the single currency contracted massively on Wednesday when the European Central Bank announced that it would no longer be allowing Greek banks to access emergency liquidity funds. The move was seen as the ECB striking a hard line stance and therefore as a destructive step in the debt discussions that could increase the probability of Greece being kicked out of the 19-nation bloc. The Pound to Euro exchange rate rose to 1.3400, helped along the way by a robust UK service sector PMI score of 57.2, beating the median market consensus of 56.3.
GBP/EUR remained fairly flat on Thursday as the Bank of England left rates on hold at the current record low of 0.50% for the 71st month in a row and Greek finance minister Yanis Varoufakis failed to convince German finance minister Wolfgang Schauble that his plans for the Greek economy would benefit the rest of Europe.
The Pound ticked higher on Friday to an almost seven-year high of 1.3450 in reaction to a robust US labour market report, which was seen to increase the possibility that the Federal Reserve could raise interest rates sooner rather than later. The threat of tighter monetary policy damaged demand for the Euro because it was seen to increase the chances of an untimely Greek exit from the Eurozone.
There are a couple of important economic releases to look out for this week. Firstly we have UK industrial production data due for release on Tuesday, which is tipped to print fairly softly at 0.5%. Then we have German CPI data, which is expected to come in at -0.3% on Thursday morning. And then we have the most important event on the calendar: the Bank of England’s latest quarterly inflation report, which is anticipated to see the BoE raise growth forecasts but reduce inflation expectations due to the current climate of multi-year low crude oil prices. The reduction in fuel costs should boost domestic spending but bring down consumer prices, which in turn is likely to see the UK central bank talk down the prospects of a 2015 rate hike. Subsequently, Sterling is liable to depreciate across the board following the announcement.
However, as ‘Grexit’ fears escalate, demand for the Euro may also decline. For this reason, GBP/EUR can be expected to remain close to seven-year highs for most of this week’s session.
Heads Up
Summary of major upcoming data releases that we think may move the market.