Foreign Currency Market Update – GBP / EUR Update
Sterling rallied by over two cents against the Euro last week during a five-day period that saw the Pound decline against almost all of its other major currency peers.
GBP/EUR rallied from under 1.3600 to 1.3700 at the start of last week’s session in response to an upbeat UK service sector report, which showed that business owners are confident that demand will continue to improve over the next 12 months. This caused some analysts to predict that British GDP accelerated from 0.6% to 0.7% in the first quarter of the year.
And demand for the single currency crumbled again on Wednesday in response to a curiously timed meeting between Greek Prime Minister Alexis Tsipras and Russian President Vladimir Putin, a gathering which raised concerns among some parties that the Greek leader was preparing for life outside the support system of the European Union. This helped drive the Pound to Euro exchange rate higher by over 120 pips to 1.3820.
The Pound declined almost exclusively across the board on Thursday in reaction to a worse-than-anticipated widening of the UK trade deficit to -£10.3 billion and a sharp surge in contracts to protect against volatility in Sterling during the UK general election period. However, anxieties related to Greece’s inability to obtain fresh funding from the EU and the IMF ensured that GBP/EUR remained close to 1.3800.
It was a similar story on Friday: downbeat domestic data hurt demand for the Pound (a weaker-than-predicted industrial output score) but sentiment towards the single currency was hampered by fears of an untimely Greek exit.
There are a number of high profile economic announcements to keep an eye out for this week. On Tuesday the UK consumer price index is predicted to remain at its all-time record low of 0.0%, but in all honesty it could easily dip into disinflationary territory, which could hurt Sterling.
On Wednesday the European Central Bank is set to maintain its current ultra-loose monetary stimulus programme, but investors will be listening attentively to President Mario Draghi’s accompanying press conference; any signs of overegged optimism could boost the Euro but any comments on the prospect of Greece leaving the currency bloc could have a significant negative impact.
At the close of the week the UK unemployment rate is tipped to hit a new six-year low of 5.6%. This could spur demand for Sterling if wage growth also remains sturdy.
Without a positive breakthrough in talks between Greece and its creditors it looks likely that GBP/EUR could remain in the region of 1.3800 for the majority of this week.
Heads Up
Summary of major upcoming data releases that we think may move the market.