Foreign Currency Market Update – GBP / EUR Update
The Pound traded close to its lowest level since May against the Euro throughout most of last week’s session as soft Bank of England rate hike bets continued to weigh on demand for Sterling.
GBP/EUR sunk from around 1.3600 to 1.3500 last Monday and fell as far as 1.3460 on Tuesday even though inflation data out of Germany showed that price pressures in the currency bloc’s largest economy slowed by -0.2% to 0.0% in September.
The soft German result boded badly for the Eurozone wide CPI and sure enough the currency bloc’s consumer price index came in at -0.1% on Wednesday morning. This disinflationary print, which investors saw as a sign that the European Central Bank may be convinced to bolster its asset purchasing scheme sooner rather than later, allowed Sterling to claw back some losses versus the Euro.
However, sentiment remained weak towards the Pound on Thursday as bets that the Bank of England won’t begin hiking interest rates until October of next year continued to hurt Sterling. UK manufacturing printed slightly higher-than-expected at 51.5 but the result still marked the second lowest print for two years and investors were discouraged by the first decline in the employment sub-index of the report since 2013. The European factory output PMI came in at a five-month low of 52.0.
The Pound to Euro exchange rate took another tumble on Friday, plunging by around a cent to strike its lowest level in almost five months. The catalyst behind the move was a dreadful US non-farm payroll report, which saw jobs growth come in way below forecast, average earnings stagnate, the lowest participation rate since 1977 and a sizable downgrade to the previous month’s score. This dismal report sent Federal Reserve rate hike bets plunging, which in turn sent EUR/USD soaring. As EUR/USD is the most liquid currency pair on the market, the large moves also benefitted the single currency versus the Pound and other major currencies. GBP/EUR touched a low point of 1.3437 before recovering slightly during the evening.
The key events to look out for this week are meetings conducted by the European Central Bank and the Bank of England.
Given GBP/EUR’s six-cent decline over the last six weeks there is scope for a rebound but sentiment appears to favour the single currency. That is as long as there are no shock announcements from either of the two major central banks.
The ECB is not expected to announce any new measures as of yet, but with consumer prices sitting in negative territory and the Euro exchange rate strengthening there is every chance that ECB President Mario Draghi will strike a dovish tone in preparation of looser policy in the future. This could hurt the single currency but the Euro has remained resilient to the threat of further easing thus far.
The BoE is also likely to remain on the sidelines and it will be interesting to see how many policymakers vote for a rise in rates. The likelihood of more than one hawk in the MPC is fairly low and as such the statement may not bolster demand for Sterling unless the BoE Governor strikes a hawkish tone.
Heads Up
Summary of major upcoming data releases that we think may move the market.