The Pound to Euro exchange rate bounced back from a one-year low last week as a dovish statement from European Central Bank President Mario Draghi weighed on the single currency.
Sterling plummeted by almost two cents to a new yearly low last Tuesday when Bank of England Governor Mark Carney admitted that policymakers had no plans to start raising rates anytime soon. The BoE chief cited a ‘powerful set of forces’ – renewed pressure on oil prices, volatility in China and sluggish domestic wage growth – as reasons not to begin tightening policy and traders took notice by driving down the value of the Pound on the foreign exchange markets. The damning remarks from the Governor erased any positive Sterling sentiment deriving from a slight rise in UK CPI from 0.1% to 0.2%.
The Pound recovered slightly against the Euro on Wednesday thanks to a surprise dip in British unemployment to a near-nine-year low of 5.1%. However, UK wage growth slowed form 2.4% to 1.9% and this took the gloss off the otherwise positive labour market report.
GBP/EUR’s recovery received a shot in the arm on Thursday when ECB President Mario Draghi spoke of heightened downside risks and mentioned that it was ‘necessary to review and reconsider [the bank’s] monetary policy stance in early March’. The dovish remarks helped Sterling appreciate by around 150 pips.
The Pound to Euro exchange rate rallied by a further 100 pips on Friday as UK government borrowing figures impressed and Draghi continued to hint at further stimulus. The latest public sector figures showed that the December deficit shrank from £11.7 billion to £7.5 billion last month and this gave Sterling a boost even though UK retail sales slowed unexpectedly from 3.5% to 2.1%.
There are two major economic events on the horizon this week: one for each currency.
On Thursday the Office for National Statistics is expected to announced that growth in the UK economy accelerated from 0.4% to 0.5% in the fourth quarter of 2015, which could support the Pound.
However, it may be difficult for GBP/EUR to rack up any significant gains if Friday’s Eurozone CPI repot shows a 0.4% rise in the headline inflation rate, up from 0.2% previously.
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Summary of major upcoming data releases that we think may move the market.