Sterling slid to its lowest level in 15 months against the Euro last week as the latest slide in global financial markets drove economic confidence down and investors pushed back their Bank of England rate hike expectations to 2020.
‘Brexit’ Fears Weigh
GBP/EUR tumbled to a 13-month low last Monday as fears surrounding Britain’s proposed in/out EU referendum eroded confidence in the Pound. Markets were alerted to the potential impact by a report from Citigroup indicating that GDP could shrink -4% and Sterling could depreciate -15-20% in the aftermath of an ‘out’ vote.
On Tuesday Sterling succumbed to a fresh over one-year low as British trade data showed that the 2015 calendar year deficit widened to -£125 billion, the worst level on record. A -£8.1 billion dip in exports highlighted the problems facing the UK economy going forward in this fragile economic environment.
The Pound recovered by around a cent against the Euro on Wednesday despite data showing that industrial output fell at its sharpest pace since 2012 in December. European investor confidence was left fraught after another day of steep losses for banking stocks, which have fallen -25% (or -$240 billion) since the start of the year.
BoE Rate Hike Bets Pushed Back to 2020
The Pound to Euro exchange rate slumped by around two cents to a 15-month low on Thursday as a major shift in market pricing saw Bank of England rate hike bets pushed back all the way to 2020. Markets now believe there’s a 50% chance of policymakers voting to slash rates in 2016. Because the Eurozone has a trade surplus with the rest of the world and Britain has a significant trade deficit, jittery investors piled out of Sterling and into the single currency to hedge against a worsening of the melee in global markets.
The main events to look out for on the economic calendar this week will be Tuesday’s UK CPI report, Wednesday British unemployment data and Friday’s UK retail sales readings.
Falling Wage Growth Trumps Rising CPI
The UK inflation report is tipped to show an improvement from 0.2% to 0.3%, which could potentially bolster the appeal of Sterling. However, in light of the recent shift in BoE rate hike bets it could be difficult for GBP/EUR to register any significant gains.
Domestic labour data is anticipated to show that UK unemployment sunk to a new multi-year low of 5.0% but analysts will likely be concerned with an expected slowdown in wage growth from 2.0% to 1.9% – much lower than the bank’s target of around 3.0% growth in 2016.
UK retail sales are expected to rise 0.7% but it could still be difficult for Sterling to appreciate in an environment of insignificant inflation and below-target wage growth.
Heads Up
Summary of major upcoming data releases that we think may move the market.