Sterling shrunk by around -250 pips versus the Euro last week to reach its lowest level in a year as ‘Brexit’ fears and soft Bank of England rate hike bets weighed on the UK currency.
The Pound’s bad start to the year against the Euro continued last Tuesday when disappointing British manufacturing data drove GBP/EUR down from 1.34 to 1.33. Manufacturing output declined -0.1% compared to calls for +0.1% growth while industrial activity weakened -0.7% compared to forecasts of 0.0%. The dud numbers were seen to rule out the possibility of an interest rate hike from the BoE in the first half of the year.
GBP/EUR remained flat on Wednesday as Eurozone factory output fell -0.7% but Sterling continued its slide on Thursday and the Pound tumbled to its lowest level since last January as traders reacted to comments from the BoE suggesting policymakers were unlikely to begin raising rates until after the proposed in/out EU referendum.
Additionally, the Pound to Euro exchange rate plunged two-cents to a new one-year low below 1.30 on Friday as negative Sterling sentiment continued to swell. The single currency was also boosted by risk aversion trends, which saw lots of investors consolidate high-yield positions that were funded with cheap credit from the Eurozone. As these positions were closed the Euro appreciated from the returning cash.
However, there are a few important ecostats on the calendar this week that have the potential to give Sterling a much-needed lift.
Tuesday’s CPI reports are predicted to show that UK inflation rose from 0.1% to 0.2% in December and that Eurozone price pressures remained at 0.2%. This would represent good news for the Pound as any move higher, no matter how small, is progress towards the BoE’s 2.0% target.
Wednesday’s UK labour market report is tipped to show a 235,000 rise in the number of jobs in Britain but any optimism derived from that number could be wiped clean if, as analysts predict, average weekly earnings cool from 2.4% to 2.1%.
Thursday’s European Central Bank policy decision could weigh on the Euro if policymakers talk up the prospect of further easing. There is a small possibility that the ECB will use this opportunity to make a further cut to the deposit rate and this could also impact the single currency.
However, it is difficult to see GBP/EUR rallying back above 1.33 during this week’s session and if the week’s data prints are worse-than-expected it is entirely possible that we could see the Pound plunge back below 1.30.
Heads Up
Summary of major upcoming data releases that we think may move the market.