Foreign Currency Market Update – GBP / EUR Update
The Pound to Euro exchange rate weakened by around three cents last week as European Central Bank President Mario Draghi disappointed market forecasts of a larger monthly asset purchasing target.
GBP/EUR began last week’s session at around 1.4200 and Sterling rallied to 1.4250 on Monday as ECB easing bets weighed on the single currency. But the pair settled down again at 1.4200 on Tuesday when UK manufacturing slowed from a 16-month high of 55.2 to 52.7 and Eurozone factory output accelerated to a 19-month high of 52.8.
The Pound slid to 1.4100 on Wednesday in reaction to a disappointing British construction PMI report. November’s construction score of 55.3 was the worst reading since April and this had a negative impact on Bank of England rate hike bets.
Things got much worse for Sterling on Thursday as ECB President Mario Draghi announced new stimulus measures but failed to raise the asset purchasing target. Markets had expected Draghi to cut the deposit rate from -0.20% to -0.30%, which he did, they had expected him to prolong the QE programme by around six months, which he did, and they had expected him to increase the monthly QE target of €60 billion… which he didn’t. Caught off-guard by the less-dovish-than-anticipated monetary policy announcement, traders piled back into the single currency in large numbers and GBP/EUR plunged to a monthly low of 1.3800.
UK data actually came in positively, with services output accelerating to a four-month high of 55.9 but it was not enough to support the Pound against the reinvigorated Euro.
It was a fairly quiet day on Friday and GBP/EUR rallied back towards 1.3900 as investors locked in profit from Thursday’s prolific Euro gains.
Looking ahead at this week’s session and the two major events to keep an eye out for are Tuesday’s Eurozone GDP report, which is forecast to confirm that the currency bloc expanded by 0.3% in the third quarter, and Thursday’s BoE policy statement, which is likely to see the UK central bank leave rates on hold at 0.50%.
It will be interesting to see whether the BoE minutes feature a hawkish shift in rhetoric because the strong Pound to Euro exchange rate has been mentioned many times as a roadblock towards a potential rate hike. BoE rate hike bets were brought forward by one month following the ECB statement, which had been expected to exacerbate the weak Euro further, so there is a possibility that Thursday’s announcement will feature a slightly hawkish bias.
Heads Up
Summary of major upcoming data releases that we think may move the market.