The Pound to Euro exchange rate weakened by around a cent last week as ‘Brexit’ fears and lower growth forecasts overshadowed the Bank of England’s latest minutes report.
Sterling slumped at the beginning of last week’s session in response to a poll published in The Daily Telegraph indicating that the ‘LEAVE’ campaign held a two-point lead in the run-up to June’s EU referendum. The report spooked markets and sent GBP/EUR spiralling lower by around a cent.
On Wednesday morning unemployment data supported the Pound, with unemployment remaining at a 10-year low of 5.1% and wage growth accelerating from 1.9% to 2.1%. However, Sterling lost ground later in the day when traders reacted to George Osborne’s Spring Budget, which featured a downgrade to this year’s growth forecast from 2.4% to 2.0%. GBP/EUR struck its lowest level in just under a month following the budget.
BoE Minutes to the Rescue
However, the Pound received an unexpected boost on Thursday afternoon when the minutes from the Bank of England’s latest minutes report were released. The central bank communiqué showed that all nine policymakers voted against altering interest rates, which on this occasion was viewed as a hawkish sign because a substantial section of the market had feared that one or two officials would vote to slash rates to stimulate demand ahead of the EU referendum.
The Pound to Euro exchange rate shot up by over a cent in the immediate aftermath of the announcement. The single currency was also weakened by a negative CPI inflation print of -0.2%.
Euro Down on ECB Helicopter Money Speculation
Sterling appreciated by another cent on Thursday as traders mulled over European Central Bank policymaker Peter Praet’s suggestion that the ECB could stimulate economic activity by handing out a basic income to all citizens, regardless of salary or employment status. The mention of helicopter money spooked markets and weighed on the single currency.
However, the topsy-turvy week continued at the close of the week when British work and pensions secretary Iain Duncan Smith resigned in defiance of a bill in the Spring Budget which threatened to cut annual payments to people with disabilities by around £1.3 billion. Sensationally, the government has since U-turned on the benefit cut but the damage to Sterling sentiment had already been done.
Investors are now citing political stability due to Tory infighting as a key concern in their pricings of Sterling.
Week Ahead
The only key ecostats to look out for this week are Tuesday’s UK CPI report, which is tipped to show inflation rose from 0.3% to 0.4% and Thursday’s British retail sales print, which is expected to feature a -1.0% monthly slide in sales volumes.
Unless we are treated to a shock in the CPI report GBP/EUR is likely to trade between 1.27 and 1.29 for the majority of this week’s session.
Heads Up
Summary of major upcoming data releases that we think may move the market.