Foreign Currency Market Update – GBP / EUR Update
The Pound plummeted by around three cents against the Euro last week as traders reacted to recent volatility in China by unwinding carry trades funded in Euros.
Sterling began last week’s session close to the 1.4100 mark against the Euro before rising to 1.4200 in reaction to a slightly better-than-anticipated UK inflation score. July’s CPI print showed that inflation rose by an unexpected 0.1% last month and that core consumer prices surged from 0.8% to 1.2%, which was seen to bolster hopes of a rate hike from the Bank of England.
GBP/EUR remained above 1.4200 for most of the day on Wednesday but the single currency rallied during the evening when Greece’s new €86 billion bailout package was officially ratified by European institutions.
And the Pound ceded more ground on Thursday morning as UK retail sales printed mildly lower-than-forecast at 4.2% rather than estimates of 4.4%. Sterling slid to 1.3970 during the evening in response to Greek Prime Minister Alexis Tsipras’ decision to call snap elections. The announcement had been telegraphed for some time so did not shock financial markets but rather breathed life into the single currency as investors bet that Tsipras would be re-elected with a cabinet of moderate ministers who would be able to implement upcoming austerity measures more smoothly than the current government of hard-left anti-austerity campaigners.
On Friday morning it was reported that the British government ran a rare surplus of £1.3 billion during July but it was not enough to halt the resurgent Euro, which posted a rampant day of gains across the board. The Pound to Euro exchange rate fell to a two-month low of 1.3775 as markets reacted to the latest signs of economic disarray in China by consolidating positions in high-beta, high-risk currencies.
It seems that over the past year traders have been borrowing at rock-bottom rates in Europe and then investing in higher-yielding currencies around the world – therefore weakening the Euro. But in response to the recent devaluation of the Chinese Yuan, plunging Chinese exports and the worst Chinese manufacturing score since 2009, traders are now unwinding their carry trades and buying back into the single currency – therefore sending the Euro shooting higher across the currency board.
GBP/EUR is currently sitting at a fresh two-and-a-half-month low of 1.3680 due to the risk-off mood in markets.
This week’s data set is likely to see British GDP confirmed at 0.7% for the second quarter and German CPI fall from 0.2% to 0.1% in August. But demand for GBP/EUR will probably be driven by external factors: if heightened volatility continues in China then we could see more strengthening of the Euro but if the situation calms down then we could easily see Sterling claw back some of its recent losses against the Euro.
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