Foreign Currency Market Update – GBP / EUR Update
Sterling remained in the lower bound of its 1.35-1.37 range against the Euro last week as markets remained quiet in the post-Christmas pre-New Year’s lull.
GBP/EUR was held back last week by concerns that low inflation would prompt the Bank of England to remain on the sidelines through the first half of 2016. Cheap petrol prices, as a result of the surprisingly long-lasting slump in crude oil, plus a plethora of cuts at the supermarkets, as budget brands Lidl and Aldi look to take market share from the more expensive traditional outlets, mean that inflation is unlikely to rise back towards the BoE’s 2.0% target anytime soon. This means that policymakers have plenty of room to leave rates at record lows for longer.
If wage growth was accelerating in line with the rise in employment over the past two years then it could be a different story but as things stand most investors do not envisage a Q1 rate hike from the UK central bank and this is putting downward pressure on the Pound.
Additionally, traders are concerned that Britons are becoming more and more EU-skeptical ahead of a potential in/out referendum later in the year. The migration crisis that has seen more people move across the continent since WWII has made Britons wary of EU membership and analysts are fearful that investment could drop off and domestic growth could slow in the build up to the referendum.
Of course Europe has its own troubles but with ‘Grexit’ fears behind us and the European Central Bank (ECB) reluctant to increase its asset purchasing target, the days of Pound to Euro exchange rates north of 1.40 could be behind us.
Data this week has so far been disappointing from both sides of the Channel: UK manufacturing sank to a three-month low of 51.9 and German inflation came in at 0.3%, undershooting forecasts of 0.6%.
Data still to come is expected to show that British construction output accelerated slightly to 56.0 in December and that the dominant UK service sector retained a robust growth rate of 55.6 last month. However, it could be difficult for the Pound to overcome resistance at 1.37 if the Eurozone consumer price index rises from 0.2% to 0.4% as expected.
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