Foreign Currency Market Update – GBP / EUR Update
The Pound to Euro exchange rate is around -150 pips lower than it was this time last week with the single currency continuing to strengthen following the European Central Bank’s decision not to increase its monthly asset purchasing target at the beginning of December.
GBP/EUR sunk from 1.3940 to 1.3780 at the beginning of last week’s session thanks to a disappointing UK manufacturing production report. Data showed that factory output shrunk -0.4% during the month of October and this hurt demand for Sterling. The Euro, meanwhile, was stabilised by a growth report confirming that the currency bloc expanded 0.3% in the third quarter.
The Pound rallied slightly on Wednesday ahead of Thursday’s announcement from the Bank of England, which saw the UK central bank strike a more dovish than anticipated tone. The BoE left rates on hold at 0.50%, with only one policymaker voting for a hike in December. The accompanying statement showed that bank officials were concerned with the recent slowdown in pay growth as well as the continued slump in crude oil prices. Generally, the BoE statement was seen as being fairly dovish but it was not enough to stop some investors betting on a UK rate rise in the second quarter of 2016 and this drove GBP/EUR higher to 1.3850.
The Pound to Euro exchange rate remained flat on Friday as UK construction output slowed from 1.0% to 0.2% and German consumer prices rose 0.4%.
However, GBP/EUR tumbled half a cent at the beginning of this week’s session in reaction to an outperforming Eurozone industrial production print of 1.9%, which beat forecasts of 1.4%.
The most important events directly related to GBP/EUR to look out for this week are Tuesday’s UK inflation report and Wednesday British labour market report.
Inflation is tipped to rebound from -0.1% to +0.1%, which could give Sterling a little boost. Unemployment is set to remain at a seven-year low of 5.3% but demand for the Pound could be hurt by a predicted dip in weekly earnings from 3.0% to 2.5% – this is especially important considering the BoE’s recent comments on slowing wage growth.
However, we could also see market movement in response to the Federal Reserve’s interest rate announcement on Wednesday evening, which is highly likely to see the central bank raise rates for the first time in nine years. If the Fed does in fact raise rates and this drags EUR/USD lower then we could see the single currency weaken against Sterling too.
Heads Up
Summary of major upcoming data releases that we think may move the market.