The Pound to Euro exchange rate rallied by around 2.5 cents last week as a disinflationary Eurozone inflation print boosted bets that the European Central Bank would act decisively at this week’s meeting.
Sterling strengthened against the single currency by over a cent last Monday as traders responded to a report from Eurostat stating that consumer prices shrank -0.2% in the Eurozone during February. The disinflationary CPI print hurt the Euro because it was seen to make additional ECB stimulus more likely.
GBP/EUR Weathers Weak Private Sector PMIs
On Tuesday it was reported that UK manufacturing output cooled to a 34-month low of 50.8 in February, down sharply on expectations of 52.3. However, GBP/EUR rallied on the day due to dovish remarks from ECB President Mario Draghi confirming there were ‘no limits’ to the policymakers’ ability to stimulate price pressures and boost economic growth.
On Wednesday UK construction data disappointed, printing at a 10-month low of 54.2 compared to forecasts of 55.5. The Pound was fairly insensitive to the data because construction accounts for just 7% of the UK economy and subsequently GBP/EUR put together a 100-pip daily gain in response to an ECB official’s claim that it was ‘vital’ to act in order to drive inflation higher.
On Thursday the triple-whammy of downbeat UK PMI results was completed when the dominant service sector index printed at its lowest level for three years. The 52.7 score, down on 55.6 previously, pushed GBP/EUR down by around 25 basis points. Considering the extent of the slowdown, Sterling was lucky to avoid further losses.
ECB Announcement In Focus
This week’s economic calendar is set to see Eurozone fourth quarter GDP confirmed at 0.3% and UK manufacturing production shrink -0.7%.
However, the majority of market moves are likely to be dictated by Thursday’s ECB policy decision. This means the Pound could find itself rising in value against the Euro ahead of the announcement in anticipation of further stimulus. But if President Draghi fails to unveil significant easing measures then it is entirely likely that the single currency could rebound on Thursday afternoon.
A deposit rate cut of -10 basis points is currently priced into the Euro, meaning that GBP/EUR is unlikely to hold onto stimulus related gains unless the ECB increases its €60 billion a month asset purchasing target.
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