Foreign Currency Market Update – GBP / EUR Update
The Pound to Euro exchange rate rallied by around two cents last week as to reach a monthly high as UK wage growth jumped to its highest level in six years and Bank of England policymakers sounded a hawkish tone on monetary policy.
GBP/EUR began last week’s session at around 1.3630 but Sterling slid to 1.3600 on Tuesday as the latest UK consumer price index report showed that inflation slowed to zero percent in August. Slumping oil prices, supermarket price wars and mild increases in autumn clothing prices were blamed for the downtick in CPI, which was seen to augur badly for BoE rate hike bets.
However, demand for the Pound surged on Wednesday when UK unemployment fell unexpectedly from 5.6% to 5.5% and British wage growth jumped from 2.6% to a six-year high of 2.9%. The upbeat labour market statistics prompted Bank of England Governor Mark Carney to comment on the possibility of a rate rise around the turn of the year. Carney said that if economic growth remains above trend, wages rise above 3.0% and core inflation continues to increase then policymakers could look to hike rates in the first quarter of 2016. The Governor, however, stated that he currently expects rates to rise in the second quarter of next year, which helped drive GBP/EUR higher to 1.3720. Other BoE officials, Ian McCafferty and Kristin Forbes also struck hawkish tones whilst Martin Weale remained slightly more cautious.
On Thursday it was reported that UK retail sales volumes increased at an annualised rate of 3.7% in August, which although the slowest pace for almost a year was not enough to impact demand for Sterling. However, the Pound lost some ground during the evening as traders sent EUR/USD higher in reaction to the Federal Reserve’s decision to leave rates unchanged in September, which subsequently pushed GBP/EUR lower.
But the Euro’s gains were short lived because markets begun to bring forward their bets for further European Central Bank easing in reaction to the dovish Fed decision.
The single currency put together a small rally on the back of Alexis Tsipras’ comprehensive victory at the latest Greek elections on Sunday but ECB easing bets took GBP/EUR to a monthly high of 1.3830 on Monday.
Looking ahead there is very little economic data of import on the calendar this week, which means that GBP/EUR will likely trade in reaction to central bank speculation. With the ECB looking likely to loosen policy in the near future and the BoE aiming to begin hiking in 2016 it is possible that we could see Sterling appreciate further over the next week.
Heads Up
Summary of major upcoming data releases that we think may move the market.