The Pound to Euro exchange rate softened last week as a mixture of Tory infighting and the devastating terrorist attack in Brussels were seen to increase political uncertainty and make a ‘Brexit’ scenario more likely.
Tory Infighting, Weak CPI, Brussels Attacks
GBP/EUR fell by around half a cent to 1.28 last Monday as traders reacted to the news of work and pensions secretary Iain Duncan Smith’s resignation. IDS claimed his decision was motivated by Chancellor George Osborne’s ‘deeply unfair’ budget but many political commentators argued the shock move had implications for the upcoming EU referendum seeing as IDS is one of the most prominent members of the ‘LEAVE’ camp. The discord among the ruling party was seen to bolster bets that Britons will vote to exit the EU in June.
Sterling’s decline accelerated on Tuesday morning when the Office for National Statistics announced that British inflation remained at 0.3% during February, confounding calls for a small uptick to 0.4%. The soft print weighed on Bank of England rate hike bets.
The Pound also lost ground in reaction to the tragic terrorist attacks in Brussels, which claimed the lives of dozens of civilians. GBP/EUR slid lower by over a cent following the bombings as markets estimated that the violence would stir up support for those in favour of leaving the European Union.
Three Months Until ‘Brexit’ Vote
The Pound plunged even lower on Wednesday when traders saw the three month implied Sterling to Euro volatility index soar to a six-year high as the EU referendum came into sharper relief. A new poll also showed the ‘REMAIN’ camp lead sliding to its lowest level since 2010.
Profit-taking took the Pound higher on Thursday after GBP/EUR initially received a boost from some better-than-anticipated UK retail sales data. The consumption index came in at 3.8% compared to calls for 3.5%.
Sterling continued to recover at the start of this week’s session when a downbeat US inflation report allowed GBP/USD to appreciate strongly, which led to large positive moves for the Pound across the board in liquidity-starved holiday trading conditions.
Week Ahead
Important events on the calendar this week are tipped to see UK fourth quarter GDP remain at 1.9%, Eurozone inflation rise minimally from -0.2% to -0.1% and the UK manufacturing PMI increase from 50.8 to 51.2.
The overall tone suggests that Sterling will not lose significant ground to the single currency unless the data seriously disappoints or BoE policymakers start talking about reducing interest rates.
Heads Up
Summary of major upcoming data releases that we think may move the market.