Foreign Currency Market Update – GBP / EUR Update
The Pound rallied by around 300 pips against the Euro last week as British data beat expectations and Greek debt negotiations took a turn for the worse.
Sterling actually began last week’s session with a sharp 150-pip depreciation to 1.35 as markets reacted to an announcement from the Greek government suggesting that policymakers in Athens were willing to work with its creditors to agree upon a deal.
However, when the Greek government’s latest reform plan was branded ‘insufficient to move the process forward’ by the EU on Tuesday the single currency started weakening. A better-than-expected UK trade balance result of -£8.6 billion, down from -£10.7 billion, also drove GBP/EUR higher.
And Sterling rose back above 1.37 on Wednesday when British industrial production printed at 0.4%, beating forecasts of 0.1%. British sentiment was also bolstered by a UK GDP estimate from the National Institute of Economic and Social Research (NIESR) suggesting growth of 0.6% in the three months leading up to May.
Thursday saw the Pound to Euro exchange rate peak above 1.38 as markets reacted negatively to news that the IMF had withdrawn its team from the Greek debt negotiations. The move was seen to make the prospect of a deal much less likely.
GBP/EUR then rose to a 10-day high just below 1.39 on Friday as senior EU leaders admitted for the first time that they had held ‘theoretical’ discussions on how to cope if Greece were to leave the Eurozone. Again, this was seen to augur very badly for the Hellenic nation and many traders chose to cut their exposure to the single currency in response to the news. The Pound was further boosted by news that construction output was higher-than-previously-estimated in the first quarter and that the British economy probably grew by 0.4%, rather than 0.3%, in Q1.
Considering the recent breakdown in Greek talks – another Greek proposal was rejected by the nation’s creditors last night – and the upcoming economic calendar it looks likely that Sterling could register further gains against the Euro this week.
GBP/EUR is currently trading just below 1.39 and EU officials are now preparing for a ‘state of emergency’ due to the increased possibility that Greece will default on loan repayments and subsequently be ejected from the currency union.
If British inflation rises from -0.1% to +0.1%, UK unemployment remains at a six-year low of 5.5% and wage growth accelerates from 1.9% to 2.1%, as expected, then we could see Sterling breach 1.40. Depending on the extent that markets become gripped by ‘Grexit’ fears it is also possible that GBP/EUR could challenge March’s seven-year highs north of 1.42.
Heads Up
Summary of major upcoming data releases that we think may move the market.