Foreign Currency Market Update – GBP / EUR Update
The Pound recovered from a four-month low to rally by over two cents against the Euro last week as UK unemployment fell to match a seven-year low of 5.4%.
Sterling suffered heavy losses on Tuesday in reaction to a lower-than-anticipated UK consumer price index score of -0.1%, which undershot analysts’ forecasts of 0.0% and appeared to put little pressure on the Bank of England to start raising interest rates. GBP/EUR fell by around -150 pips from 1.3510 to 1.3360 following the soft inflation report.
However, the Pound clawed back most of its losses on Wednesday when the headline UK unemployment rate dipped to a joint-seven-year low of 5.4% and average earnings ticked higher from 2.9% to 3.0%, which signalled that the labour market is strong enough to handle higher rates, even if the inflationary outlook is not.
The Pound to Euro exchange rate rallied by a further 100 pips to 1.3600 on Thursday as demand for the single currency was negatively impacted by comments from European Central Banker Ewald Nowotny suggesting that the bank needs to loosen policy further in order to drive inflation back up towards the 2.0% target.
GBP/EUR is currently trading close to a monthly high of 1.3660 thanks to upbeat remarks from Bank of England policymaker Kristin Forbes, which showed that some bank officials do not see the threat of contagion from emerging markets as being as significant as others. There appears to be a three-way split, with three policymakers keen to crack on and raise rates, three eager to leave policy loose for as long as possible and three standing in the middle waiting for further evidence that growth in real wages will lead to higher consumer prices.
There are two key events to look out for this week in relation to the Sterling to Euro exchange rate and they are both due to take place on Thursday.
First we have the UK retail sales report for September which, in annual terms, is tipped to show that sales volumes accelerated from 3.5% to 4.7% last month and therefore could raise rate hike expectations because consumer spending accounts for over two-thirds of the domestic economy.
The second significant release on Thursday is the ECB’s policy decision, which is likely to see the bank remain on the sidelines but could feature dovish commentary from President Mario Draghi on the prospect of enhanced easing in future months.
With GBP/EUR in the ascendency over the past seven days it is possible that Sterling could rally towards psychological resistance at 1.3800 this week. But with ECB easing struggling to bring down the value of the single currency GBP/EUR could remain flat in the absence of a strong jawboning from Mr Draghi.
Heads Up
Summary of major upcoming data releases that we think may move the market.