Sterling tumbled by around a cent-and-a-half against the single currency last week as Bank of England Governor Mark Carney struck a dovish tone and European Central Bank President Mario Draghi left policy on hold.
GBP/EUR Hits Monthly High
The Pound to Euro exchange rate rallied to a monthly high just below 1.20 last Monday in reaction to a resilient UK service sector PMI print of 52.9 in August. The surprise rise from 47.4 in July marked the biggest monthly jump in the index’s 20-year history and was seen to reduce the probability of further BoE stimulus in 2016.
And GBP/EUR touched a new six-week high on Tuesday as jittery traders sold the Euro on concerns that the ECB might bolster its stimulus scheme on Thursday.
However, sentiment towards Sterling soured somewhat on Wednesday when BoE Chief Mark Carney confirmed policymakers were ready to act again with further stimulus if needed. The Pound also suffered in response to data from the Office for National Statistics (ONS) showing that manufacturing production declined -0.9% in July – the fastest pace for a year.
ECB Holds Off On Stimulus
Demand for GBP/EUR waned again on Thursday afternoon following the ECB’s decision to leave monetary policy unchanged. President Mario Draghi said that slender downgrades to growth and inflation forecasts were ‘not so substantial to warrant a decision to act’ and expressed concerns that the bank could encounter a scarcity of bonds. Markets reacted to the policy statement by sending the Euro higher causing GBP/EUR to tumble to 1.18.
The Pound to Euro exchange rate hovered above 1.18 on Friday as trade data showed that the UK deficit narrowed £1.2 billion to -£11.8 billion in July.
Week Ahead
The main event to look out for on the economic calendar this week is Thursday’s BoE policy statement. Markets are not betting on further stimulus and we could see Sterling tick higher if the forecasts are correct. However, we could see GBP/EUR plunge if the bank cuts rates or bolsters its QE scheme.
Other events to look out for include the UK inflation and unemployment reports and the Eurozone CPI print. British inflation is likely to have risen to 0.7% but is unlikely to have much of an impact on BoE policy decisions. The Eurozone figure, however, could weigh on the single currency if it comes in below the consensus of 0.2%.