Foreign Currency Market Update – GBP / EUR Update
Despite a clear indication from European Central Bank President Mario Draghi that the ECB is planning to bolster its quantitative easing scheme, the Pound to Euro exchange rate slid by a cent last week.
GBP/EUR sunk from around 1.3800 to 1.3680 last Monday and the Pound lost more ground on Tuesday as softer-than-anticipated UK manufacturing numbers weighed on British growth prospects and subsequently weakened Bank of England rate hike expectations. Sterling struck a weekly low of 1.3510 after the UK manufacturing PMI came in at 51.5 compared to forecasts of 52.0.
Wednesday saw GBP/EUR rebound to 1.3640 despite construction output printing below the median consensus of 57.5 at 57.3.
Demand for Sterling remained soft on Thursday morning as the heavily-watched UK service sector PMI sank to a two-year low of 55.6. However, the Pound was given a shot in the arm during the afternoon when ECB President Mario Draghi cut Eurozone growth and inflation projections and hinted that the bank is preparing for an increase in asset purchases in order to help drive consumer prices back towards the 2.0% target. The recent volatility in China and commodity markets was cited as the primary concern. The dovish commentary sent GBP/EUR higher by around 100 pips to 1.3740.
Strangely, the single currency managed to claw back some of its ECB-related losses on Friday. It seems that despite hawkish rhetoric from BoE Chief Mark Carney, markets don’t foresee a rate hike from the UK central bank until the third quarter of next year and Sterling declined as investors readjusted their projections.
There are a few things to look out for on the economic calendar this week.
First we have the second quarter Eurozone GDP report on Tuesday, which is anticipated to confirm that growth ticked along at a slow rate of 0.3%. This will probably be taken as a neutral signal for the single currency.
Then we have the UK industrial production report on Wednesday, which could give Sterling a boost if it impresses but conversely could hurt the Pound if the data disappoints.
Possibly the most important event to hone-in on is Thursday’s Bank of England interest rate announcement. Nobody expects the BoE to raise rates at this juncture but the accompanying minutes report could give some important clues as to how officials at the bank are feeling about the prospect of tightening policy in the future. If the minutes reveal that policymakers are anxious that Chinese volatility could impact UK growth and inflation prospects then Sterling could remain weak against the Euro. However, if the central bank report shows that officials are keen to start normalising monetary policy regardless of the deflationary impact of the slowdown in China then we could see the Pound surge higher against the single currency.
Heads Up
Summary of major upcoming data releases that we think may move the market.