The Pound to Euro exchange rate slid below 1.10 last week to hit its lowest level in six-and-a-half years as ‘hard Brexit’ fears persisted.
Sterling Remains Fragile
Following the ‘flash crash’ on Friday October 7, which saw the Pound plummet sharply across the board, demand for the UK currency has remained soft and speculators are predicting that Sterling will continue to weaken over the coming months.
At the start of last week’s session, sentiment was hurt by news that Russian bank VTB was planning to move its European operations from the UK to Frankfurt in reaction to ‘Brexit’, while Bank of England policymaker Michael Saunders noted that he would ‘not be surprised’ if the Pound ceded more ground. Saunders also mentioned that the BoE would be prepared to look through a currency-driven spike in inflation, which suggested policy would remain loose even if CPI started rising towards and beyond the 2.0% target. The downbeat news sent GBP/EUR below 1.10 to a fresh six-and-a-half-year low.
The Pound recovered slightly on Wednesday morning in reaction to UK Prime Minister Theresa May’s claim that she would be aiming for ‘maximum possible access’ to Europe’s single market following ‘Brexit’. However, sentiment quickly soured during the afternoon when ‘Brexit’ Secretary David Davis asserted that it would be the government, and not parliament, that ultimately decides when to invoke Article 50 and how to negotiate Britain’s future trade deals.
GBP/EUR Weak As ECB Faces Calls To Cool Stimulus
Sterling traded fairly flatly versus the single currency on Thursday as European Council President Donald Tusk said that the idea of anything other than a ‘hard Brexit’ was unrealistic. Demand for the Euro was lifted slightly by dark mutterings that the European Central Bank was considering tapering its QE scheme in order to aid those Eurozone banks that have struggled with profitability in the current low-interest rate environment.
Over the weekend tensions flared between British officials and rumours that Chancellor Phillip Hammond was considering resigning even emerged. The potential for additional instability weighed on the Pound even though PM Theresa May has since voiced her support for the Chancellor.
Week Ahead
This week sees UK CPI and unemployment data, plus an important policy decision from the ECB.
British inflation is tipped to have risen from 0.6% to 0.9% in September, however, Sterling may not receive much of a boost from the figures because of the BoE comments on allowing CPI to increase without tightening policy. The unemployment rate is expected to remain at a decade-low of 4.9%, which, again, is unlikely to bolster Sterling’s appeal at this juncture.
The ECB decision is predicted to see policy left unchanged but markets will be very interested in the rhetoric employed by President Mario Draghi. The hint of future easing could give Sterling the impetus to mount a mini rally, while any suggestion of tapering the QE programme could send GBP/EUR to fresh six-and-a-half-year lows.