Foreign Currency Market Update – GBP / EUR Update
The Pound to Euro exchange rate struck a series of new three-month highs last week as policymakers at the European Central Bank talked up the possibility of further monetary loosening in December.
GBP/EUR began the week just under 1.4200 and demand for Sterling spiked during the afternoon in response to remarks from the ECB’s Vice President Vitor Constancio who noted that the devastating terror attacks in Paris could ‘compound’ the problems the Eurozone economy is already facing. Consumer prices in the currency bloc actually rose faster-than-expected from 0.0% to 0.1% but it was not enough to drive the single currency higher.
On Tuesday the headline UK inflation index came in at -0.1% as predicted by traders but the Pound managed to rally on the back of a surprise rise in the core CPI figure, which strengthened from 1.0% to 1.1%. This uptick in price pressures, exclusive of volatile food and fuel markets, sent GBP/EUR higher by around 70 pips to a new three-month high of 1.4314 as markets considered the possibility of a swift rebound in inflation in the New Year.
GBP/EUR remained strong on Wednesday as Bank of England Deputy Governor Ben Broadbent commented that markets were ‘focussing too obsessively’ on the bank’s latest inflation forecasts, which worked under the assumption that interest rates would not rise until the beginning of 2017. These positive remarks were taken as a suggestion that the UK central bank could yet hike rates in the first half of next year.
Demand for Sterling dropped off slightly on Thursday when UK retail data printed much worse-than-anticipated at -0.9% for October, marking a steep turn around from September’s booming 1.5% surge. However, the downbeat figure had less of an impact on the Pound than it could have because analysts were expecting a correction following September’s strong score, which was boosted by Britain hosting the Rugby World Cup.
Although ECB President Mario Draghi suggested that he ‘will not hesitate’ to loosen monetary policy further in December if deemed necessary, the Pound lost more ground to the Euro on Friday thanks to the worst October budget deficit for six years. The British government borrowed £8.2 billion last month to balance the books and this hurt the Pound because traders had anticipated a much lower figure of around £6.0 billion.
Going forward Sterling looks to be the currency with the best momentum despite the two soft ecostats at the end of last week’s session. We could see the Pound to Euro exchange rate remain close to a three-month high over the next few days because German third quarter GDP is tipped to come in at 0.3%, which is unlikely to boost the Eurozone Q3 GDP score of 0.3%.
The Pound could lose support on Wednesday if the Autumn Statement is seen to weigh heavily over growth expectations.
But UK Q3 growth is likely to be confirmed at 0.5% on Friday and subsequently we could see GBP/EUR challenge for new highs in the region of 1.4320.
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