After a week of large swings the Pound to Euro exchange rate finds itself around a cent higher than it was seven days ago.
Buy the Rumour, Sell the Fact
GBP/EUR tumbled to two-month lows at the start of last week’s session in response to rumours that Prime Minister Theresa May was planning to break away from the EU single market and customs union.
On Tuesday the PM signalled just that. However, demand for the Pound surged in reaction to May’s commitment to allow parliament to vote on Britain’s new EU trade deal. This was seen to reduce the chances of the more extreme Eurosceptics in the government pushing through a Brexit deal that would be unnecessarily negative for the UK economy.
The Pound jumped higher versus all the majors, marking its best daily gain for over a decade as traders locked in profit from the GBP depreciation leading up to PM’s speech.
Sterling Settles As ECB Strikes Dovish Tone
Last week’s major UK data reports showed that British inflation jumped from 1.2% to a two-year high of 1.6% and that unemployment remained at an 11-year low of 4.8%. However, the sanguine reports were unable to give Sterling a further lift and GBP/EUR drifted slightly lower during Wednesday’s session.
Thursday saw the European Central Bank leave policy unchanged but the single currency suffered following ECB Chief Mario Draghi’s statement. Draghi warned that policy would remain loose for an extended period of time and argued that the recent uptick in Eurozone inflation – CPI struck a three-year high of 1.1% in December – was largely due to rising oil prices and did not represent an underlying build in price pressures.
Week Ahead
The big events on the calendar this week are the UK fourth quarter GDP revision – which is tipped to see growth downgraded from 0.6% to 0.5% – and the UK Supreme Court ruling on Brexit, which is likely to see parliament given a vote ahead of the UK government triggering Article 50.
Sterling could rally versus the Euro following the announcement, especially if the wording of the ruling gives devolved assemblies in Scotland and Northern Ireland the power to vote on the matter. The recent political breakdown in Northern Ireland would make it more difficult for UK PM May to trigger Article 50 in March and this would likely boost the appeal of the Pound.
But even if devolved assemblies are not given a say, the base case scenario carries the potential of sending GBP/EUR higher on Tuesday – even if the boost is only temporary.