Foreign Currency Market Update – GBP / EUR Update
The Pound to Euro exchange rate struck a new seven-year high last week as ‘Grexit’ fears continued to weigh on the single currency and an upbeat quarterly inflation report from the Bank of England boosted demand for Sterling.
GBP/EUR began last week’s session at around 1.3440. The Pound was under a little bit of pressure from traders who felt that the BoE was likely to dampen rate hike expectations, but the Euro was under considerably more pressure due to a lack of progress in the negotiations surrounding Greece’s colossal debt pile.
Sterling rose to around 1.3500 on Tuesday in reaction to a better-than-expected manufacturing report, which showed that factory output grew by 2.4% in 2014. Demand for the Euro remained soft as Greek PM Alexis Tsipras and finance minister Yanis Varoufakis failed to persuade the nation’s creditors that a debt shuffle was the only way to stabilise Greece’s finances.
The standoff between Greece and the Eurogroup of European finance ministers continued on Wednesday and this ensured that Sterling traded at strong levels against the Euro.
And the Pound appreciated even further against the single currency on Thursday, rallying by over half a cent to a new seven-year high of 1.3562, in reaction to the Bank of England’s upbeat appraisal of the UK economy. Governor Mark Carney stressed that reduced oil prices would have a net positive impact on the domestic economy and predicted that wages and inflation would accelerate as a result of the boost to consumer spending that cheaper fuel costs would provide. Mr Carney also released a new set of economic projections indicating that GDP would grow by 2.9% this year and next, and suggesting that inflation would overshoot the 2.0% target if rates were not raised in the next two years. This final detail gave the Pound a boost and caused markets to bring forward their rate hike expectations by six months to suggest that the first rate hike will take place at the beginning of 2016.
There are a few key events to look out for this week. Tuesday’s UK consumer price index is expected to show that inflation slowed to a new 25-year low of 0.4% in January, but shouldn’t have too much of a negative impact on Sterling because investors are already braced for a period of oil-induced low inflation.
Wednesday’s British unemployment figures are tipped to show that joblessness remains at record lows in the UK, which should provide a minor boost to the Pound.
But perhaps the most important event will be tonight’s meeting between Greece and its creditors. The chances of a deal are very slim but the consequences of a clear conclusion could be brutal. If the Eurogroup decides that the new Greek government’s (Syriza’s) requests are untenable then we could see the beginning of the first untimely exit from the Eurozone. However, if a deal is agreed upon, either this evening or at later date, then the Euro could claw back some of its recent losses as relief spreads across the 19-nation bloc.
Heads Up
Summary of major upcoming data releases that we think may move the market.