The Pound reached a five-week high against the Euro last week as pollsters predicted that Britain would not vote to leave the European Union at next month’s referendum.
GBP/EUR Rallies to 5-Week High
Optimism carried over from the previous week pushed Sterling higher last Monday. ‘Brexit’ bets had been cut after US President Barack Obama warned it could take ten years for Britain to agree a new trade deal with America outside of the EU. Sterling traders were also cheered by NCP’s latest poll, which showed just a 20% chance of Britons voting in favour of ‘Brexit’.
GBP/EUR rallied 50 pips to a new five-week high north of 1.29 on Tuesday, but the Pound failed to maintain that level for long.
On Wednesday UK GDP for the first quarter came in at 0.4%. The result marked a sizable cooling from Q4’s 0.6% expansion, but Sterling was barely impacted by the result because investors had predicted the slowdown prior to the print.
Thursday saw the Pound rise minimally in reaction to a deceleration in German consumer prices from 0.3% to 0.1%.
Eurozone GDP Doubles in Q1
However, the Pound to Euro exchange rate stuttered on Friday, sliding -130 pips as Eurozone GDP smashed market expectations. The first quarter growth report showed that the currency bloc expanded 0.6% at the beginning of the year – twice as fast as the 0.3% growth registered in Q4 2015. The surprisingly sturdy GDP print boosted sentiment towards the single currency and Sterling continued to slide at the start of this week’s session.
Poor UK manufacturing data, showing the first contraction in output since 2013, drove GBP/EUR towards 1.26 earlier this morning and we could see the Pound soften further if subsequent PMI reports come in negatively.
Looking Ahead
Wednesday’s construction report is due to see activity remain sturdy at 54.0 but investors will be much more interested in Thursday’s service sector print. The UK’s dominant service industries account for over 70% of economic output and subsequently a weak number could easily hurt GDP expectations and weigh on the Pound.
Following last week’s robust Eurozone growth report we will need to see a decent UK services PMI to push GBP/EUR back above 1.27.
Heads Up
Summary of major upcoming data releases that we think may move the market.