The Pound to Euro exchange rate tumbled by around a cent last week as the Bank of England signalled it was in no hurry to raise UK interest rates.
European Data Improves
GBP/EUR began last week’s session close to 1.18 but got off to a bad start as Eurozone data printed positively. German CPI hit a three-year of 1.9% in January, which pushed the currency bloc’s consumer price index up to a four-year high of 1.8%. Additionally, the single currency benefitted from a seven-year low Eurozone unemployment print of 9.6% and an acceleration of GDP from 0.4% to 0.5%.
However, demand for the Euro tailed off on Wednesday when a leaked European Commission note indicated that the currency bloc could lose out if negotiators failed to agree upon a ‘workable deal’. The fear that Britain’s post-Brexit trade deal with Europe could damage economic output is one of the main reasons that GBP/EUR has plunged around -12% since the referendum, so naturally any sign that a positive agreement could be on the cards was seen to bolster the appeal of the Pound.
Neutral BoE Hurts Sterling
But Sterling tanked against the single currency again on Thursday following the BoE’s latest policy statement. The bank left rates on hold at 0.25% and maintained its monthly asset purchasing target of £435 billion, but traders were disappointed by the lack of enthusiasm from Governor Mark Carney to start raising rates.
Carney argued that borrowing costs were equally likely to rise or fall in the future, despite surging price pressures and a better-than-anticipated period of economic growth following the Brexit vote. In the bank’s quarterly inflation report 2017 GDP forecasts were upgraded to 2.0% – from 1.4% in November and 0.8% in August. But this was not enough to alter Threadneedle Street’s inflation projections, which see CPI peaking at 2.8% in 2018.
The bank also shifted its unemployment equilibrium rate down from 5 to 4%-4.75%, which suggests officials are willing to let the jobless rate slide towards 4.0% before they consider it appropriate to tighten policy with higher interest rates. The Pound tumbled towards 1.16 following this announcement.
Unexpectedly soft UK service sector data drove Sterling lower again on Friday, printing at 54.5, down from 56.2. The influential services PMI completely overshadowed an earlier report, which had shown that manufacturing output remained close to a two-and-a-half-year high in January.
Week Ahead
There is very little on the economic calendar this week so GBP/EUR sentiment is likely to be dictated by the Brexit bill being discussed in parliament. Investors believe that it is best for MPs to attach extra conditions to UK PM Theresa May’s plan, which currently states that if parliament rejects her eventual deal Britain will revert to World Trade Organisation tariffs.
We could see a little bit of support for Sterling if MPs agree to give parliament slightly more of a say in the negotiations. Or, we could see GBP/EUR slide if the threat of expensive WTO tariffs remains part of the uncertain Brexit equation.