The Pound to Euro exchange rate rallied by almost two cents last week as a hawkish message out of the Bank of England and decent domestic data sent Sterling higher.
Hawkish BoE
Demand for the Pound flourished at the start of last week’s session when BoE policymaker Kristin Forbes said that interest rates could begin to rise soon if economic growth and inflation prospects continue increasing as they have done since the Brexit vote.
The Euro, meanwhile, was hurt by comments from European Central Bank Chief Mario Draghi suggesting that the bank’s quantitative easing scheme would be extended past its projected endpoint in January 2018 if economic conditions failed to pick up over the next 10 months.
Grexit Fears Return
The single currency remained under pressure throughout the week as talk of Grexit returned to the fore. Greece needs to secure its latest tranche of financial aid before a large €7 billion debt repayment is due in July. However, the leftist Greek government is at odds with its lenders who want Athens to agree to further austerity measures in return for the cash injection. The Greek debt crisis has weighed heavily over the Euro in the past and it looks set to rear its ugly head again if the parties involved fail to reach an accord. The fear for investors is that if a deal is not reached Greece will be ejected from the currency bloc, which could exacerbate anti-Euro sentiment in other Eurozone member states.
EU exit fears – but not Brexit – continued to drive GBP/EUR higher towards the end of the week as fears persisted that French far-right French leader Marine Le Pen could win this year’s Presidential elections.
GBP/EUR spiked again on Friday when UK manufacturing output smashed forecasts of 0.5% with a 2.1% monthly expansion in December and industrial production printed at 1.1%, beating bets of 0.2%. The sanguine private sector data was seen to boost the chances of an upgrade to the fourth quarter GDP score and suggests that the British economy is in better health than previously anticipated.
Inflation & Unemployment On Tap
There are three ecostats to look out for this week that could cause fluctuations in GBP/EUR: the UK CPI report, the Eurozone Q4 GDP print and the UK unemployment report.
Although rising inflation is cited as a threat to British economic growth, as it could deter consumer spending, the threat of surging CPI carries the potential of persuading the BoE to start tightening monetary policy. This means that Sterling could pop if UK CPI rises from 1.6% to a new two-year high of 1.9%.
With the Euro area quarterly GDP rate tipped to remain at 0.5% and the British jobless rate expected to remain at 4.8% there is less potential for volatility with these two releases. However, any deviations from forecasts could certainly drive market moves.