Despite one policymaker voting for higher interest rates in August, the Pound lost ground to the Euro last week as investors banished hopes of a Bank of England rate hike taking place before the end of the year.
GBP/EUR remained close to technical support of 1.4240 last Monday as UK manufacturing printed fairly softly at 51.9. Although the PMI marked an improvement on the previous month’s two-year low the report still conveyed a severe lack of vigour in the UK manufacturing sector. Weakness in Europe and the strong Pound were blamed for the lack of foreign demand.
On Tuesday construction output came in at 57.1, which was one point lower than the previous score of 58.1. Despite the urgent need for new homes in Britain it was the residential building sector that witnessed a slowdown during July.
Sterling managed to register some lean gains on Wednesday, rising to a weekly high of around 1.4380 despite the fact that July’s UK service sector PMI printed below the median market consensus. The slide in tertiary output from 58.5 to 57.4 completed a full set of slightly but not overly disappointing private sector reports. However, demand for the Pound was stoked by hopes of a hawkish message from Thursday’s triple whammy of Bank of England policy announcements.
But when Thursday came traders were disappointed. The BoE elected to keep rates on hold at 0.50% and it emerged that only one policymaker voted for higher rates in August (investors had hoped for two or three hike votes). The UK central bank also cut its 2015 inflation forecast from 0.6% to 0.3%, which was seen to make the prospect of a tightening of policy this year much less likely. The Pound to Euro exchange rate declined by over a cent to 1.4200 following the not so ‘Super Thursday’ BoE announcements.
Sterling fell further on Friday to strike a weekly low of 1.4094 as the UK trade deficit widened to £9.2 billion and Spanish industrial production printed at a five-year high of 4.5%.
The most important things to look out for during this week’s session are Wednesday’s UK labour market report and Friday’s Eurozone GDP numbers.
The British unemployment rate is tipped to remain at 5.6% but average wages could fall from 3.2% to 2.8%. If the numbers follow the median market forecasts then we could see demand for the Pound slide as rate hike bets are pushed back further into the future.
The Eurozone GDP report is anticipated to show that the currency bloc expanded by 0.4% in the second quarter, which would represent a fairly sturdy score for the continent considering the uncertainty in Greece during that period.
Following the change in BoE policy expectations last week there is a chance that Sterling could weaken further against the Euro over the next five days.
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