The Pound rallied by around 150 pips versus the Euro last week, recovering from a seven-week low thanks to a surprisingly hawkish statement from the Bank of England.
Brexit Remains A Drag
GBP/EUR remained constrained by fears relating to Britain’s imminent exit from the European Union at the beginning of last week’s session. Due to the fact that a majority of Scottish voters wished to remain in the EU, Scottish First Minister Nicola Sturgeon announced last week that she was planning to hold a second independence referendum. This weighed on the Pound, as did concerns that rising import costs would drive inflation back above the rate of pay growth.
On Wednesday British unemployment printed at a 41-year low of 4.7% thanks to an unexpected -0.1% drop in joblessness. The sanguine score, however, was overshadowed by a dip in wage growth from 2.6% to 2.2%, which spooked markets because it was seen to speak to a wider trend of falling household purchasing power.
Hawkish BoE Dissent Boosts GBP
The single currency rose following news that Dutch Prime Minister Mark Rutte registered a clear victory over anti-Islamist, anti-EU far-right challenger Geert Wilders. Wilders was seen as a threat to the future of the currency bloc and as such news of his defeat was seen to boost sentiment in the Eurozone.
However, the Euro quickly found itself ceding ground to the Pound following Thursday’s midday Bank of England policy statement. The BoE left rates and QE on hold, as expected, but traders were shocked to learn that one policymaker, Kristin Forbes, had dissented and voted for higher rates in March. The minutes report revealed that other members of the rate-setting team were veering towards voting for higher rates, given that UK inflation is currently running at a two-year high of 1.8% and expected to carry on rising.
Week Ahead
The Pound to Euro exchange rate remains on a surer footing following the hawkish BoE dissent and Sterling could gain further if this week’s UK inflation report confirms expectations that price pressures are accelerating. The UK CPI for February is tipped to jump from 1.8% to 2.1%, which would appear to add weight to calls for higher BoE interest rates later in the year. Compared to 25% last Monday, traders now believe there is a 44% chance of a rate hike in November 2017.
Also on the agenda is the British retail sales report for February and the Eurozone private sector PMI readouts for March.