Foreign Currency Market Update – GBP / EUR Update
The Pound to Euro exchange rate sunk to its lowest level in almost four months last week as fears of a financial meltdown in China persuaded investors to unwind carry trades priced in Euros.
Last Monday saw the British stock market suffer losses of over -£86 billion and the benchmark European index lose around -£268 billion as investors around the world cut back their exposure to riskier assets in response to another market meltdown in China. Another consequence of the shift in risk appetite was a large influx of cash into the Euro as investors sold off high-beta assets that had been purchased with cheap credit in the Eurozone. This drove GBP/EUR from 1.3780 to a multi-month low of 1.3485.
Sterling rebounded by over 150 pips on Tuesday as demand for the single currency was impacted by quotes from European Central Bank Vice President Vitor Constancio suggesting that the deflationary impact of recent events in China could cause the ECB to loosen policy further. However, the Pound was unable to hold onto these gains and GBP/EUR plunged during the New York session.
The Pound attempted to claw back recent losses against the Euro throughout the week but was unable to assert itself above resistance at 1.3760.
On Friday Sterling did manage to close above 1.3760 thanks to speculation that the ECB may need to bolster its quantitative easing scheme. However, GBP/EUR fell back down again on Monday as Eurozone inflation rose from 0.1% to 0.2%.
The big economic releases to look out for this week are the UK service sector report, which is tipped to boost Sterling with a sturdy score of 57.7, and the ECB’s latest policy announcement, which is unlikely to yield a change in policy but could see policymakers pave the way for increased asset purchases in the future.
With Bank of England Governor Mark Carney keen to stress that Britain is more insulated from the China crash than other countries, the prospect of a first quarter 2016 rate hike remains. However, markets appear skeptical and it may take a large hawkish signal to reignite BoE rate hike bets. This means that Sterling could struggle to push ahead against the single currency over the next seven days unless the service sector report impresses or a number of BoE officials come out and voice their support for a Q1 hike.
Heads Up
Summary of major upcoming data releases that we think may move the market.