The Pound to Euro exchange rate declined by over two cents last week, sliding from a two-month high to a six-week low as UK data disappointed.
Second Scottish Referendum?
The start of last week’s session saw Sterling tumble in reaction to rumours that Scotland was preparing to launch a campaign to hold a second independence referendum due to the fact that the majority of the Scottish electorate voted to remain in the European Union. Although the UK Prime Minister has attempted to play down the prospect of a second independence vote, anxieties surrounding the breakup of the 309-year-old political union at the same time as the split from the EU applied downward pressure on the Pound.
GBP/EUR continued to cede strength on Tuesday due to Brexit related jitters despite a fairly hawkish message from incoming Bank of England Deputy Governor Charlotte Hogg, who hinted she would be less tolerant to above-target inflation than other officials at the bank.
UK Data Disappoints
Having already lost out on a cent, GBP/EUR’s week got worse on Wednesday when UK manufacturing data printed lower-than-anticipated. The headline factory output PMI dipped from 55.7 to 54.6, disappointing estimates of 55.8. On the other side of the Channel the single currency benefitted from a 2.2% German CPI print, which marked the fastest rise in inflation for over four years.
Inflation for the Eurozone as a whole printed at a four-year high of 2.0% on Thursday, however, Sterling managed to snap four days of consecutive defeats by rallying mildly against the Euro as investors locked in profit.
But Sterling’s misery continued on Friday as UK service sector output came in at a five-month low of 53.3 for February. Sturdy business confidence was overshadowed by sliding consumer spending trends, which analysts posited would likely deteriorate through the year as rising inflation erodes household purchasing power. In contrast, the Eurozone composite of private sector output stuck a near-six-year high of 55.5. GBP/EUR lost a further -80 pips to hit a six-week low.
Week Ahead
The only major economic event on the schedule this week is the European Central Bank’s policy decision on Thursday. The ECB is expected to leave rates and QE on hold, however, given the recent shift upwards in inflation we could see President Mario Draghi strike a slightly less dovish tone than at previous meetings. If the prospect of winding down asset purchases or raising interest rates is discussed then the single currency could appreciate, however, if Draghi talks down tightening bets then the Euro could slide.
Other factors that could influence GBP/EUR trading this week include Brexit developments and anti-EU far-right French candidate Marine Le Pen’s Presidential campaign.