The Pound to Euro exchange rate tumbled by around three cents last week to reach an 11-month low as Bank of England (BoE) rate hike expectations diminished and risk sentiment drove traders back into the single currency.
Sterling rallied by around half a cent to 1.3600 last Monday as German inflation missed expectations of 0.6% with a disappointing print of 0.3%.
GBP/EUR ticked higher to 1.3650 on Tuesday when Eurozone CPI came in at 0.2%, confounding expectations of 0.4%.
But the Pound’s luck ran out on Wednesday when UK service sector output slowed from 55.9 to 55.5 and Eurozone private sector growth reached a four-and-a-half-year high of 54.3. The single currency was also helped by comments from European Central Bank policymaker Peter Praet suggesting that the bank would not raise its asset purchasing target in the future. This pushed GBP/EUR down to 1.3550.
Sterling continued to plummet on Thursday as volatility in Chinese markets stoked risk aversion trends, which subsequently prompted traders to close positions taken out in Euros. This ‘portfolio balancing channel’ effect, whereby investors borrow at cheap rates in Europe and invest in riskier assets when confidence is high but then sell the risk assets and buy back into the single currency when sentiment declines looks set to support the Euro over the next few weeks.
Data shows that equity markets lost -5% last week, making 2016 the worst start to a year on record, which suggests that investors’ appetite for riskier assets could remain weak.
Sterling continued to weaken versus the Euro on Friday and GBP/EUR struck an 11-month low of 1.3236 as the ‘portfolio balancing channel’ effect bolstered the Euro and softer BoE rate hike bets weighed on the Pound.
As investors look to lock-in profit from the 11-month low GBP/EUR rate we could see the Pound inch forward against the single currency over the next few days but last week’s declines mean that 1.3500 could prove tough resistance for Sterling to cross.
Data this week is anticipated to show that UK manufacturing production shrunk -0.8% in November and that the BoE will not be raising rates in January.
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