Foreign Currency Market Update – GBP / EUR Update
The Pound to Euro exchange rate softened slightly last week as investors reacted to the first full Conservative budget for almost 20 years.
GBP/EUR began the week at around 1.4150 and Sterling remained close to that level last Tuesday as UK industrial production printed sturdily. The production index rose by 0.4% during the month of May, which helped drive the annual figure up to a better-than-expected 2.1%.
Traders had feared that Greece could be ejected from the currency bloc on Tuesday evening but the negotiations were delayed and subsequently demand for the Euro ticked a little higher in relief. GBP/EUR weakened further on Wednesday when Chancellor George Osborne announced a new raft of spending cuts in his austerity budget speech. The Pound fell by around -170 pips in reaction to the statement, which featured a downgrade to 2015 growth from 2.5% to 2.4% and a freeze in working-age benefits.
Thursday saw the Bank of England leave interest rates on hold at 0.50% as expected. And Friday saw the UK trade balance deficit fall to its lowest level for almost two years, which gave Sterling a little bit of a boost.
Over the weekend Greek PM Alexis Tsipras managed to agree upon a deal that should theoretically keep the Hellenic Republic in the Eurozone.
Following a weekend of what has been described by European officials as ‘mental waterboarding’ Tsipras was forced to accept a new collection of recessionary austerity measures, which the Financial Times dubbed ‘the most intrusive economic supervision programme ever mounted in the EU’ in exchange for around €86 billion of funds over the next three years.
GBP/EUR rose by around 120 pips to 1.4030 in response to the deal as some investors fretted over the possibility that Tsipras will not be able to push the tough new reforms – some of which were explicitly voted down in the recent referendum –through parliament. There are also concerns as to how the new measures will rip apart the already fragile Greek economy. Many investors are asking: if recessionary measures haven’t worked in the past five years what’s to say they will now?
There are three big things to look out for this week.
Tomorrow’s UK CPI inflation rate, which is tipped to slide back to zero. Wednesday’s UK labour market report, which is forecast to show unemployment hold steady at 5.5% as rises accelerate to 3.3%. And Wednesday’s parliamentary vote in Greece, which should see the new austerity measures pass with the help of opposition voters.
The British inflation data could hurt the Pound but Sterling will likely rally if wage growth does indeed print at 3.3% on Wednesday as this will open the door to an earlier-than-expected BoE rate hike.
If the Greek deal passes parliament then we could see the Euro recover but if it fails then the single currency could plummet.
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Summary of major upcoming data releases that we think may move the market.