After making a fairly solid start to last week, the Pound Sterling to Euro exchange rate plummeted before the weekend.
Last Monday GBP/EUR rallied by around a cent in response to some better-than-anticipated UK manufacturing data. The Markit PMI showed that factory output accelerated unexpectedly from 52.1 to 52.9 in January, outpacing the Eurozone print of 52.3.
The Pound performed well again on Tuesday as UK Prime Minister David Cameron announced he was close to agreeing a deal with the European Union to keep Britain in the 28-nation bloc and reduce in-work benefit payments to new arrivals.
Sterling then registered a fortnightly high on Wednesday in reaction to some better-than-expected service sector data. The January PMI announcement pointed to a slight uptick in activity within the sector, which analysts said would equate to an acceleration from 0.5% to 0.6% in economic growth at the beginning of 2016.
Sterling Sinks on Not-So Super Thursday
However, the wheels came off on Thursday and Sterling began to depreciate rapidly as investors continued to cut their 2016 Bank of England rate hike bets. The ‘Super Thursday’ trio off announcements from the BoE showed that rates would not be raised for a considerable amount of time. Governor Mark Carney confirmed that the next move would be up: ‘absolutely, the whole MPC stands by that’. But traders were alerted to a dovish shift when the minutes report showed that after months of voting 8-1 against raising rates, February’s vote saw policymakers unanimous 9-0 against tightening at this juncture.
A downgrade to British GDP forecasts for the next two years also weighed on the Pound and helped bring GBP/EUR lower by almost -150 pips.
‘Brexit’ Fears Return
The Pound to Euro exchange rate continued to slide on Friday and through the weekend as traders got their hands on a new poll conducted by YouGov showing that the out campaign currently holds a nine-point lead in the run-up to the in/out EU referendum. Demand for the Pound eased following the announcement and GBP/EUR fell through psychological resistance at 1.30 as global risk sentiment turned sour, sending investors who had taken out cheap loans in the Eurozone back into the single currency.
Quiet Economic Calendar Favours Euro
This week’s economic calendar is fairly quiet, with UK industrial production set to increase 1.0% and Eurozone Q4 GDP forecast to remain at 0.3%. Barring any big surprises, the data calendar is unlikely to drive any large moves in GBP/EUR.
This means Sterling could struggle to mount a recovery as risk aversion flows drive cheaply obtained carry funds back into the single currency.
Heads Up
Summary of major upcoming data releases that we think may move the market.