Sterling tumbled to a new three-year low versus the single currency at the start of this week’s session as traders sold the Pound in reaction to UK Prime Minister Theresa May’s latest ‘Brexit’ announcement.
Deutsche Bank Fears Weigh On Euro
The Pound to Euro exchange rate managed to mount an 80-pip rally last Tuesday due to concerns that a crisis at Deutsche Bank (DB) could bring fresh tumult to the currency bloc’s fragile banking sector. Shares at DB plunged -3% to a new all-time low as a $14 billion fine from US financial regulators inspired a spell of capital flight. Some commentators speculated that if DB were to suffer further losses it could force the German government to prop-up the investment bank with state aid – something which the Bundestag has fiercely opposed in other struggling Eurozone states. This political quandary was seen to carry huge consequences for German Chancellor Angela Merkel and subsequently demand for the Euro declined.
GBP/EUR hovered above 1.16 on Wednesday as Bank of England Governor Mark Carney talked up the British economy’s robust reaction to the ‘Brexit’ vote but Deputy Governor Minouche Shafik said that she would rather loosen policy early to stay ahead of the curve.
Strong Data No Match For May’s ‘Brexit’ Proposal
Towards the end of the week second quarter UK GDP was revised up from 0.6% to 0.7% and service sector output for July came in positively at 0.4%. However, demand for the Pound weakened significantly over the weekend in reaction to UK Prime Minister Theresa May’s comments on ‘Brexit’.
May said that Britain would invoke Article 50 of the Lisbon Treaty by the end of March 2017, thus starting the two-year divorce process from the European Union. Analysts were worried by a) the timescale of the plan, in that is sooner-than-expected and will coincide with elections in Germany and France, and b) May’s drive for absolute sovereignty, which suggests the UK government is planning to pursue a future outside of the single market.
Can GBP/EUR Recover From 3-Year Low?
The Pound to Euro exchange rate tanked to a new three-year low in response to May’s proposal and failed to recover even when September’s manufacturing data showed the sector experienced its strongest month for over two years last month. The data cast doubts over whether the BoE would opt to loosen policy further in November but overbearing ‘Brexit’ anxieties prevented Sterling from catching a bid.
This week sees UK service sector data for September and if the report shows a bumper month for the dominant industry, which accounts for around 80% of UK GDP, then we could see Sterling rebound a little bit. If the services PMI fails to impress then it is entirely possible that Sterling will continue hitting fresh three-year lows.