Foreign Currency Market Update – GBP / EUR Update
The Pound reached a two-and-a-half-month high against the Euro last week but GBP/EUR gave back its gains following a surprisingly dovish quarterly inflation report from the Bank of England.
Sterling got off to a good start against the single currency last week thanks to a 16-month high manufacturing PMI score of 55.5, which massively outshone expectations of a two-year low 51.3. Surging export orders and increased employment within the factory sector were seen as the most promising elements of the report.
GBP/EUR rose from below 1.4000 to 1.4080 on Tuesday as optimism from the manufacturing data combined with a decent construction output PMI result of 58.8 boosted sentiment towards the Pound. The Euro, on the other hand, was hurt by remarks made by European Central Bank President Mario Draghi suggesting that he was ‘willing and able to use all instruments available’ to drive Eurozone inflation back up towards the 2.0% target.
On Wednesday the third and most important British PMI report was released and showed that the dominant service sector, which accounts for more than 70% of British GDP, came in better-than-expected at 54.9 in October. This sent the Pound to Euro exchange rate up to a two-and-a-half-month high of just below 1.4200.
However, demand for Sterling diminished on Thursday afternoon and GBP/EUR sunk to 1.3980 in response to a decidedly dovish set of statements from the Bank of England. The bank reduced both its inflation and growth forecasts for the next few years and realigned its interest rate projections to suggest that rates may not rise until the first quarter of 2017. Despite the change in forecasts, Governor Mark Carney said that it would be ‘prudent’ to suggest that rates will probably rise in 2016.
The Pound rose back above 1.4000 on Friday afternoon as global risk sentiment was dealt a significant blow by a much better-than-anticipated US labour market report, which led to a massive upward swing in Federal Reserve December rate hike bets.
The main events to look out for this week are Wednesday’s UK labour market report and Friday’s Eurozone GDP report.
Traders expect UK unemployment to remain upbeat at a seven-year low of 5.4% but demand for the Pound could be stoked by an expected rise in average wages from 3.0% to 3.2%.
But the Euro could garner support if Friday’s GDP report impresses: quarterly growth is tipped to remain steady at 0.4% but the yearly figure is anticipated to rise from 1.5% to 1.7%.
Interestingly, the single currency could also tick higher if ECB President Mario Draghi reacts to the latest surge in US rate hike bets by softening talk of further stimulus in the currency bloc. The rationale behind this argument is that higher interest rates in the US would likely lead to a tightening of monetary conditions in the Eurozone and a weaker Euro exchange rate, thus negating the need for further action from the ECB.
It looks as if GBP/EUR could trade close to psychological support at 1.4000 for the majority of this week’s session.
Heads Up
Summary of major upcoming data releases that we think may move the market.