Foreign Currency Market Update – GBP / EUR Update
The Pound to Euro exchange rate sunk to a two-and-a-half-month low in the build-up to Christmas as soft inflation prospects and poor public borrowing figures continued to weigh on Bank of England rate hike expectations.
GBP/EUR weakened by around a cent to 1.3650 last Monday as traders reacted to a report from the Confederation of British Industry (CBI) highlighting how government intervention in the labour market to push up the minimum wage could hamper business investment and weigh on productivity.
And Sterling declined further, to a two-and-a-half-month low of 1.3492 on Tuesday, as worrying government finance figures showed that Chancellor George Osborne was forced to borrow £14.2 billion in November to balance the books. The heady figure overshot analysts’ expectations of £11.1 billion and doubled October’s total of £6.7 billion. The Pound was also impacted by remarks from Bank of England policymaker Martin Weale admitting that the need for higher rates was ‘slightly less immediate’ because of additional factors (weak wage growth and further declines in crude oil) weighing on inflation.
On Wednesday British third quarter GDP was revised down from 0.5% to 0.4%, which brought the annualised figure down from 2.3% to a two-year low of 2.1%. However, the Pound managed to rally to 1.3640 against the single currency as traders locked in profit from Tuesday’s two-and-a-half-month low.
And GBP/EUR traded fairly flatly over the Christmas Holiday period before resuming its downward spiral at the beginning of this week’s session.
There aren’t really any significant data releases on the calendar this week but we could see heightened volatility as those braving it to their desks between Christmas and New Year find their trades doing more to move the market than usual in these thin trading conditions. The Pound should manage to remain above support at 1.3500 for the most part but could struggle to rally back towards 1.3700 unless we see a significant shift in sentiment over the next few days.