Foreign Currency Market Update – GBP / EUR Update
Despite the Volkswagen scandal, the Euro displayed remarkable resilience last week, with the GBP/EUR exchange rate fluctuating between highs of 1.3635 and lows of 1.3465 in response to Bank of England (BoE) interest rate hike developments.
The Euro kicked off the week trending higher across the board as the US Non-Farm Payrolls report saw investors ditch the ‘Greenback’. With EUR/USD being the world’s most-traded currency pair, the US Dollar’s weakness drove the Euro’s strength and the common currency kept the Pound trending at a multi-month low.
Further GBP/EUR gains were accrued in the wake of the UK’s sub-par Services PMI being published, with the Pound also suffering from bets the Bank of England (BoE) will hold off increasing interest rates until 2017. The pairing enjoyed some respite on Wednesday and surged to its highest levels of the week as the pace of industrial production in Germany slowed dramatically.
This sign of weakness in the Eurozone’s largest economy reignited speculation surrounding the possible expansion of quantitative easing by the European Central Bank (ECB) and weighed on the Euro. Meanwhile, Sterling’s rally was also due to better-than-forecast UK Manufacturing and Industrial Production figures.
The GBP/EUR uptrend wasn’t to last however and the news that the Greek government survived a vote of no-confidence, in conjunction with dovish minutes from the BoE’s policy meeting, sent the Pound lower. The appeal of the British currency was further reduced on Friday thanks to a wider-than-anticipated UK trade deficit and an unexpected slump in domestic construction output.
On Monday the Pound to Euro exchange rate was trending in a fairly narrow range, with Sterling managing to eke out a modest gain in response to the announcement that Volkswagen is recalling cars from China.
While tomorrow’s UK Consumer Price Index has the potential to inspire GBP/EUR volatility, investors with an interest in the pairing will also be focusing on the ZEW Economic Sentiment Index for Germany. If ecostats for the European superpower continue providing cause for concern, the ECB might be persuaded to review its quantitative easing programme before the end of the year – a Euro-negative development.
GBP/EUR gains could be recorded if the rate of annual UK inflation improves on the 0.0% figure forecast and the currency pair may climb further on Wednesday if the UK’s latest employment numbers show the increase in positions and rise in average earnings predicted by economists.
Final inflation data for Germany and the Eurozone as a whole is unlikely to have much of an impact on demand for the Pound Sterling to Euro exchange rate unless the data is revised from initial estimates, but the Eurozone’s Industrial Production report will be of interest.
EUR shifts could also occur as a response to USD sentiment. Positive US news could bolster Fed rate hike expectations, boost the US Dollar and undermine demand for the Euro over the next five days.
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