Foreign Currency Market Update – GBP / EUR Update
The Pound struck a fresh seven-year high of 1.396 against the Euro last week as the impact of the European Central Bank’s latest monetary easing measures depressed the yields on Eurozone government bonds to record lows.
The single currency performed fairly well against Sterling last Monday thanks to some better-than-anticipated European data. GBP/EUR fell from 1.3800 to a weekly low of 1.3698 in reaction to a surprise uptick in Eurozone inflation, from -0.3% to -0.6%, and an encouraging downtick in joblessness, from 11.4% to 11.2%. In Britain it was reported that manufacturing output rose at a rate of 54.1 during February but it was not enough to halt the Euro on this day of rare gains.
The Pound rallied back to 1.3750 on Tuesday due to a downbeat report from Sentix suggesting that there is currently a 38% chance that Greece could exit the Eurozone, which is the highest breakup index score since 2012. British construction data impressed with a PMI score of 60.1.
GBP/EUR ticked higher to 1.3780 on Wednesday even though the latest UK service sector report slowed from 57.2 to 56.7 in February. However, the underlying tone of the report was positive with sturdy business expectation figures and the second-strongest surge in job creation on record.
On Thursday the Euro succumbed to a new seven-year low in reaction to ECB President Mario Draghi’s comments on the central bank’s new quantitative easing programme. Draghi explained that the scheme would involve the purchase of €60 billion worth of Eurozone government bonds each month until at least September 2016, and possibly even further into the future if necessary. He also mentioned that the bank would be purchasing bonds with yields as low as -0.20%, which persuaded some investors that the programme could have a significant impact on borrowing costs – and subsequently yields – in the currency bloc.
And the Pound pushed ahead further on Friday, reaching another new seven-year high, this time of 1.3916, due to the reduced yield offered on European bonds. Even member states in the periphery saw 10-year yields sink below 2.0%: Portuguese bonds tumbled to 1.7%, Italian to 1.26% and Spanish to 1.24%.
Looking ahead at the economic calendar this week there does not appear to be too many market moving data releases. UK industrial production could have an impact if it deviates from expectations but it is more likely that ECB QE concerns will dominate investor sentiment. With GBP/EUR currently trading at its best rate since 2007 there is scope for a reversal but due to the minimal profits offered on Eurozone government debt there is every chance that the single currency could continue to weaken.
Heads Up
Summary of major upcoming data releases that we think may move the market.