The Pound to Euro exchange rate strengthened by around a cent to strike a new two-month high last week as investors reacted favourably to Chancellor Phillip Hammond’s Autumn Statement.
Markets Cheer Transitional ‘Brexit’ Deal
Sterling jumped from below 1.16 to above 1.17 last Monday in reaction to calming comments from UK Prime Minister Theresa May. The PM attempted to assuage business leaders’ fears that Britain could slip off a ‘cliff edge’ with no trading regulations in place the day the UK officially leaves the EU by hinting that she would be pursuing a transitional deal to give firms stability.
GBP/EUR fell back on Tuesday despite data showing that October’s current account deficit was the lowest since 2008 at -£4.8 billion. The Pound failed to catch a bid on the news because investors were concerned with the fiscal year-end targets: the government has borrowed £48.6 billion so far this financial year, meaning there is little chance of hitting the March target of £55 billion.
Autumn Statement Boost
Sterling appreciated by around a cent to a new two-month high on Wednesday following the Chancellor’s first budget statement. The Pound rallied in response to plans to invest £23 billion on infrastructure and investment over the next five years and to the largest mid-year increase in government debt issuance since the financial crisis.
The large investment drive was seen to boost chances of overturning the productivity gap and the £15 billion government debt sale drove yields higher on UK Gilts, therefore making British bonds more attractive to foreign investors.
The Autumn Statement also saw Hammond announce a surprisingly high £122 billion ‘Brexit’ black hole in the UK’s public finances over the next five years, while the Office for Budget Responsibility (OBR) downgraded UK growth in 2017 from 2.2% to 1.4% and 2018 GDP from 2.1% to 1.7%.
GBP/EUR traded choppily on Thursday and Friday, with UK Q3 GDP data printing sturdily at 0.5% and European Central Bank stimulus bets wounded by rumours that President Draghi was considering delaying any QE extensions until the New Year.
Week Ahead
The main ecostats to look out for this week are the UK and Eurozone manufacturing PMI reports, predicted to print at 54.3 and 53.7 respectively, and the Eurozone CPI report for November, which is anticipated to see inflation tick higher from 0.5% to 0.6%.
The economic reports are unlikely to drive GBP/EUR significantly lower or higher because investors are currently focussed on political issues. This means any developments regarding ‘Brexit’ or the Italian constitutional referendum on Sunday could prove more important for the currency pair.