The Pound to Euro exchange rate slid to a three-week low last week in reaction to the Bank of England’s surprisingly aggressive new stimulus package.
UK Private Sector Data Disappoints
GBP/EUR softened slightly last Monday as Markit Economics downgraded its July manufacturing PMI index from 49.1 to 48.2. An alarming drop in new orders – the fastest monthly plunge in 18 years – contributed to the downbeat result, which piled more pressure on the Pound. Across the channel in the Eurozone factory output scores decelerated slightly but most of the bloc’s largest economies maintained positive growth.
Sterling managed to post an 80-pip gain on Tuesday, even as British construction output printed at its lowest level for seven years, at 45.9. It appears that traders were keen to settle short positions and lock in profit by buying back into the Pound. This process is known as a ‘short covering rally’ and often leads to sharp pullbacks – as was the case later on in the week.
But the Pound continued to rise on Wednesday despite data showing that private sector activity shrank to its worst level in seven years in July, which analysts said signaled the UK economy was on track for a 0.4% contraction at the start of Q3.
Pound Plunges Following BoE Easing
After hitting a 10-day high just shy of 1.20, Sterling plummeted by around two cents on Thursday in response to the BoE’s robust new monetary easing measures. In addition to a predicted 0.25% interest rate cut, the central bank announced it was adding £60 billion to the quantitative easing scheme, allocating £10 billion for the purchase of corporate bonds and creating a new £100 billion Term Funding Scheme (TFS) to help commercial banks pass the rate cut onto customers.
The Pound depreciated in response to the new measures as UK Gilt yields fell to record lows, making investments denominated in Sterling less attractive to speculative investors. Governor Mark Carney also cut the bank’s 2017 GDP forecast from 2.3% to 0.8% and suggested that each of the four new stimulus measures would likely be upgraded if UK economic data continues to disappoint following the ‘Brexit’ vote. However, the Pound’s losses were tempered by Carney’s dismissal of negative interest rates and helicopter money.
Week Ahead for GBP/EUR
The Sterling to Euro exchange rate has traded fairly flatly since the BoE’s ‘Super Thursday’ stimulus announcement and there appears to be little on the data calendar to prompt any large moves this week.
The only two prints to look out for are Tuesday’s UK industrial production report, which is tipped to see output rise from -0.5% to 0.1%, and the Eurozone second quarter GDP reading, which is expected to confirm quarterly growth of 0.3%.
This means GBP/EUR could remain at three-week lows for the time being, however, many analysts expect the Pound to devalue further against the single currency in the medium term.