The Pound to Euro exchange rate struck a near-three-year low last week as the fallout from Britain’s decision to leave the European Union started to be felt.
‘Brexit’ Weighs on Commercial Property
GBP/EUR began last week’s session at around 1.19 and managed to avoid losses on Monday even though UK construction output printed at a seven-year low in June. The shockingly low 46.0 PMI score was mostly compiled before the referendum, so future surveys are predicted to show further shrinkage in the sector.
The Pound suffered a massive shock on Tuesday when three of Britain’s major commercial property funds announced that they were suspending trading due to an overwhelming amount of withdrawal requests. The news sent shockwaves around the UK economy because 75% of small businesses use commercial property as collateral for loans. The fear is that these investment funds will now look to sell properties in order to repay clients, thus driving commercial property prices lower and making it much more difficult for SMEs to obtain funding for expansion and hiring. The Bank of England estimates that for each 10% drop in commercial property prices there is a 1% fall in general economic investment.
GBP/EUR Hits 33-Month Low
Sterling struck a near-three-year low of 1.16 on Wednesday morning as more commercial property funds froze trading, putting over half of Britain’s £25 billion property investment sector on ice. In other news, the recent depreciation in GBP/EUR meant that, in Euro terms, France overtook Britain as the world’s fifth largest economy on Wednesday.
GBP/EUR remained fairly flat on Thursday as The European Central Bank (ECB) released minutes from its latest meeting, in which a desire to boost inflation with further stimulus was discussed.
The Pound gained around half a cent against the single currency on Friday and Sterling held onto its gains at the start of this week’s session, helped by Tory leadership candidate Andrea Leadsom’s decision to pull out of the race. This leaves Theresa May unopposed to become the next Prime Minister. Markets were generally happy to see one layer of political uncertainty removed from the equation.
What Next For GBP/EUR?
The main event on the economic calendar this week is Thursday’s interest rate decision from the Bank of England. Markets anticipate a 70% chance of a 25 basis point cut to the benchmark interest rate from 0.50% to 0.25%. If these estimates prove accurate we are likely to see Sterling weaken further and potentially strike a new 33-month low. The Pound’s losses could be even greater if the bank decides to roll out another round of quantitative easing.
On the other hand, the Pound could mount a small rally if the BoE opts to wait for August’s announcement to loosen policy and adjust inflation forecasts. However, even if the UK central bank does not slash rates this week, the Pound may fail to hold any relief rally gains for long as Governor Mark Carney has indicated that further stimulus is forthcoming.