Foreign Currency Market Update – GBP / EUR Update
Downbeat UK service sector figures caused the Pound to weaken by over two cents against the Euro last week.
The Pound began last week on the back foot as Markit’s latest UK manufacturing PMI survey printed worse-than-expected at 52.0 for May. The underwhelming factory output score sent GBP/EUR falling from 1.3960 to 1.3920.
Sterling continued to depreciate on Tuesday as Eurozone inflation jumped from 0.0% to 0.3% and Greece submitted a set of economic proposals to its creditors. The rise in Eurozone consumer prices suggests that the European Central Bank’s quantitative easing programme is working, and therefore will not need to be bolstered, which was seen to augur well for the single currency. The 47-page list of Greek economic reforms was not accepted by the nation’s lenders but it did show that the Hellenic nation is serious about making concessions in order to receive financial assistance and this helped drive GBP/EUR down to 1.3760.
The Pound to Euro exchange rate declined again on Wednesday, this time by one-and-a-half cents to 1.3600 as the British service sector PMI came in at 56.5, compared to forecasts of 59.2. The soft result caused investors to estimate that the UK will only grow by 0.4% in the second quarter and this hurt Bank of England rate hike expectations. The Euro also benefitted from comments from ECB Chief Mario Draghi suggesting that inflation will remain in positive territory for the rest of the year.
Sterling recovered slightly on Thursday and continued to do so on Friday as markets reacted to the latest spat between Greek PM Alexis Tsipras and the institutional leaders he is negotiating with. Tsipras claimed that an economic reform proposal put forward by Greece’s creditors was ‘absurd’ and European Commissioner Jean-Claude Juncker accused the Greek PM of lying about the EC’s willingness to negotiate over Greek pensions.
The most important things to look out for on this week’s economic calendar are the first quarter Eurozone GDP numbers, which are likely to be confirmed at 0.4% QoQ and 1.0% YoY, and the UK industrial production report, which is tipped to show sturdy annualised growth of 0.6% in the sector.
However, the GBP/EUR rate is also likely to be effected by the debt negotiation talks in Greece. Any sign of a deal that will help to keep the Hellenic nation in the Eurozone – and thus avoid the potentially devastating fear of contagion that could accompany a Greek exit – could seriously increase demand for the single currency. But on the other hand, another week of bickering and stalled talks could drive investors out of the Euro and allow the Pound to rally back.
Heads Up
Summary of major upcoming data releases that we think may move the market.