Foreign Currency Market Update – GBP / EUR Update
The Pound to Euro exchange rate has risen by around two cents over the last week in reaction to a hawkish statement from the Federal Reserve.
GBP/EUR began last week’s session at around 1.3930 before dipping to 1.3860 on Tuesday when British data showed that the UK economy lost a bit of steam in the third quarter of this year. Annualised economic output slowed from 2.4% to 2.3% as the quarterly figure cooled from 0.7% to a lower-than-anticipated 0.5%.
But the Pound to Euro exchange rate leaped higher on Wednesday evening in response to a surprisingly hawkish Fed policy statement, which appeared to pave the way for a rate hike in December. This positive US monetary policy signal served to highlight the contrast between the outlooks of the Fed and the ECB and the subsequent mauling that took place in EUR/USD translated into sharp losses for the single currency against Sterling.
The Pound traded just below 1.4000 for a couple of days as mildly encouraging inflation figures – German CPI rose from 0.0% to 0.3%, which helped drive Eurozone CPI up from -0.1% to 0.0% – prevented the Euro suffering further losses. But the single currency’s resistance gave in on Friday afternoon and GBP/EUR rallied to a 70-day high of 1.4037 on ECB easing bets.
The Pound pushed ahead further at the start of this week’s session thanks to a surprisingly strong UK manufacturing PMI report, which saw output rise from 51.5 to a 16-month high of 55.5, confounding fears that factory output would accelerate at its slowest pace for over two years.
The biggest two events to keep an eye out for this week are Wednesday’s UK service sector report and Thursday’s announcement from the Bank of England.
The British service sector accounts for over 70% of UK output and is therefore the most important gauge of private sector activity. Traders are primed for a rise in October output from 53.3 to 54.5 and anything over 54.0 should be enough to bolster demand for Sterling.
The BoE interest rate announcement is unlikely to have a big impact on currency markets taken in isolation, as nobody expects the bank to hike at this juncture. However, the accompanying quarterly inflation report could prove much more meaningful. UK unemployment is at a seven-year high, economic output has finally surpassed its pre-recession peak, wage growth is comfortably outpacing inflation and manufacturing is finally showing signs of improvement after this week’s shock PMI report – all of which signal that BoE Governor Mark Carney could talk up the prospects of a rate hike in the Spring of next year.
Provided UK service sector output remains strong and the BoE report gives rate hike bets a little bit of a boost it is entirely possible that Sterling could rally to 1.4120 and then 1.4200 against the Euro this week.
Heads Up
Summary of major upcoming data releases that we think may move the market.