Foreign Currency Market Update – GBP / EUR Update
The Pound to Euro exchange rate fell by around a cent from a three-month high last week as policymakers at the Bank of England (BoE) struck a dovish tone.
The single currency rallied by around 50 pips on Monday, bringing GBP/EUR down from 1.4300 to 1.4250 as the composite Eurozone index of private sector output rose to a four-year high of 54.4.
Demand for the Pound weakened further on Tuesday as BoE Governor Mark Carney confirmed that monetary policy would not be tightened until more economic developments had been witnessed and BoE chief economist Andy Haldane repeated his warning that rates may even need to be reduced before they are raised. The dovish central bank statements took Sterling to a weekly low of 1.4130.
However, GBP/EUR recovered some of its losses on Wednesday thanks to a surprisingly positive Autumn Statement. Analysts had expected Chancellor George Osborne to unleash a raft of new austerity measures to help balance the books but, aided by a £27 billion increase in forecasted earnings, Osborne was able to limit his cuts and launch a number of new spending projects. Traders were cheered by upgraded GDP forecasts of 2.4% for 2016 and 2.5% for 2017 and Sterling rallied to 1.4250 in response.
The Pound to Euro exchange rate remained fairly sturdy on Thursday before sliding to 1.4200 on Friday in reaction to a report showing that, although the UK economy expanded by 0.5% in the third quarter, domestic consumption rather than external trade is fueling British growth. Services output increased 0.7% but net trade contributed a negative -1.5%, which was the worst score on record and this weighed on demand for the Pound.
There are a number of PMI indicators to look out for this week in Britain but by far and away the biggest news event to watch out for is the ECB’s policy announcement on Thursday.
Markets have been pricing in additional easing from the ECB for many weeks and months now, which means that the market reaction may not be that straightforward. Traders expect ECB President Mario Draghi to push the bank’s deposit rate further down into negative territory at the very least. They are also expecting a dovish statement with plans to widen the asset purchasing remit or expand the €60 billion a month QE programme. If Draghi delivers a powerful statement of new stimulus measures then we could see GBP/EUR rally towards three-month highs north of 1.4300. However, if markets are unimpressed by the policy statement then we could see the Euro rally and GBP/EUR fall back towards 1.4000.
Heads Up
Summary of major upcoming data releases that we think may move the market.