Foreign Currency Market Update – GBP / EUR Update
Despite upbeat comments from Bank of England policymakers regarding the path of interest rates, the Pound was unable to register any lasting gains against the Euro last week.
GBP/EUR began last week’s session at around 1.3610 before rising to 1.3800 on Tuesday afternoon in reaction to news of a major corporate takeover deal that could see £3.5 billion pumped into the UK economy. Eurozone GDP printed positively at 0.4% compared to forecasts of 0.3% but it was not enough to lift the single currency on this occasion.
Sterling softened to 1.3700 on Wednesday as British industrial production shrank -0.4% and manufacturing production declined -0.8%. British sentiment was also hurt by a -9% plunge in exports, which drove the deficit higher from -£8.5 billion to -£11.1 billion.
The Pound to Euro exchange rate did muster one more rally, hitting 1.3800 on Thursday as the latest BoE minutes revealed that policymakers were not currently seriously concerned over the impact that the recent slowdown in China could have on the domestic economy.
However, GBP/EUR was back down to 1.3610 by the end of Friday’s session as investors exercised caution ahead of the Labour leadership contest on Saturday, which saw Eurosceptic left-winger Jeremy Corbyn register a landslide victory over his opponents. The increased possibility of a British exit from the Eurozone now that Corbyn is at the helm of the opposition was seen as a negative signal for Sterling because a ‘Brexit’ could drive businesses out of the UK.
There are two key events to look out for on the calendar this week: Tuesday’s UK CPI print and Wednesday’s British labour market report.
The UK inflation numbers are tipped to show that price pressures stagnated in August, with some analysts arguing that consumer prices actually declined last month, which is liable to soften investor demand for Sterling.
The labour market report is expected to reveal that unemployment remained steady at a sanguine 5.6% and that wage growth ticked higher from 2.4% to 2.5% during July. These figures could support the Pound whilst any unexpected rises in average earnings could give BoE rate hike bets a boost.
The latest minutes report from the BoE, plus subsequent comments from policymakers on the potential for inflation to rise faster-than-expected over the next 18 months show that officials are keen to begin raising interest rates fairly soon. However, markets don’t anticipate a rate hike until the third quarter of 2016. This means that there is scope for Sterling to rally if there is a shift in investor sentiment to match the rhetoric from the BoE.
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Summary of major upcoming data releases that we think may move the market.