Sterling tumbled by around a cent-and-a-half against the Euro last week, influenced by comments from the British Chancellor on the prospect of more monetary stimulus.
BoE Stimulus Bets Drive GBP/EUR Lower
The Pound to Euro exchange rate weakened by around -80 pips at the start of last week’s session when UK Chancellor Phillip Hammond said that the Treasury had never refused a Bank of England request for quantitative easing in the past and that he saw no reason why QE would be refused in the future. The comments weighed on Sterling as investors bet that we could be treated to additional stimulus in the foreseeable future.
Speaking in the House of Lords, BoE Governor Mark Carney defended the bank’s decision to support the economy with stimulus following the ‘Brexit’ referendum, however, he did not drop any significant hints that policymakers are currently considering adding to the asset purchasing target, and this allowed Sterling to stabilise.
GBP/EUR performed better on Wednesday when an anonymous European Central Bank official told reporters that the ECB was almost certain to extend its own QE scheme past the current end date of March 2017. While in London, junior ‘Brexit’ minister David Jones said that both houses of parliament would be given the chance to examine the government’s ‘Brexit’ trade agreement. This boosted hopes that any deal that was seen as too much of a ‘hard Brexit’ may not be ratified.
UK GDP Beats Forecasts
Sterling dropped to an interbank rate of 1.11 against the single currency towards the end of the week even though British GDP data came in stronger-than-anticipated. It was reported that growth slowed from 0.7% to 0.5% in the third quarter but the result still marked a significant improvement on forecasts of 0.3%. Sadly, production, construction and agriculture all contracted, leaving the dominant service sector to drag the economy forward with a 0.8% expansion.
The Euro made more gains on Friday when German consumer prices rose from 0.7% to 0.8% and Eurozone economic confidence jumped to a 2016 high of 106.3. The Pound lost out as a challenge to the UK’s ability to trigger Article 50 was rejected by the High Court of Northern Ireland.
Week Ahead
This week sees important UK PMI data released, but Sterling may struggle to gain from the figures because they are tipped to show that output decelerated slightly during October. The Pound’s best chance of catching a bid is a sturdy service sector score.
On Thursday the Bank of England is due to announce monetary policy for November. Back in August traders were anticipating that policymakers would vote for lower interest rates at this meeting, but the subsequent depreciation in the Pound suggests that the BoE may hold fire for now. Any concrete nods towards further stimulus could send Sterling reeling, while any rhetoric to suggest that monetary policy will not be loosened again could give GBP/EUR a little bit of a boost.