Sterling sank to a near-two-year low against the Euro last week as a new opinion poll sparked a surge of bets to protect against volatility should Britons vote to leave the European Union during June’s referendum.
GBP/EUR appreciated by around half a cent on Monday as investors locked in profit from a 16-month low Sterling to Euro exchange rate.
On Tuesday data showed that activity within the dominant UK service sector increased from 52.7 to 52.7 in March but the composite PMI index of private sector output tumbled to its lowest level in three years and subsequently demand for the Pound faltered and GBP/EUR slid lower by around a cent to strike a new 19-month low.
‘Brexit’ Fears Drive Pound Lower
The Pound to Euro exchange rate tumbled -80 pips to a near-two-year low on Wednesday in reaction to an ICM opinion poll suggesting that 44% of Britons want the UK to remain in the EU and that 43% want Briton to leave. The slender one-point lead for the REMAIN camp spooked investors who had previously estimated only a 33% chance of a ‘Brexit’.
Analysts are worried that a vote to leave the European Union could deter business investment, prompt a run on Sterling and make it far more expensive for the government to service its mammoth budget deficit. However, in the long run a ‘Brexit’ vote could also prove detrimental to the EU if other nations attempt to renegotiate new deals or hold their own referendums.
Dovish ECB Weighs on Euro
Sterling managed to claw back some of its losses on Thursday as markets reacted to the European Central Bank’s latest minutes report, which revealed that policymakers were ready to loosen policy further – although not by cutting rates – if inflation rates remain in the red.
GBP/EUR ticked 20 pips higher on Friday as Greek CPI shrunk from -0.5% to -1.5%. The dud Greek inflation report diverted attention away from a sharp -1.8% drop in UK manufacturing production and a downbeat forecast from the National Institute of Economic and Social Research (NIESR) suggesting that UK GDP growth halved from 0.6% in Q4 2015 to 0.3% in Q1 2016.
Week Ahead
Inflation figures due this week for both the UK and the Eurozone are tipped to rise 0.1%. However, with British CPI set to increase from 0.3% to 0.4% and Eurozone price pressures predicted to inch higher from -0.2% to -0.1% it looks like Sterling could hold the upper hand over the next few days.
The Bank of England’s policy decision on Thursday is unlikely to see the central bank alter policy and subsequently the Pound shouldn’t see too much volatility surrounding the release. Sterling cold tick higher throughout the week provided there are no new ‘Brexit’ related shocks.
Heads Up
Summary of major upcoming data releases that we think may move the market.