The Pound to Euro exchange rate rallied by around a cent last week thanks to climbing UK inflation and retail sales.
UK CPI Surges Above 2.0% Target
Sterling rallied versus the single currency at the start of last week’s session following an unexpectedly large leap in the UK CPI rate. Rising from 1.8% to 2.3%, beating expectations of 2.1%, February’s report marked the first time in three years that British inflation has overshot the Bank of England’s 2.0% target. BoE officials have hinted that they are prepared to let price pressures rise without hiking interest rates, so long as the CPI spike is only temporary. Inflation is currently predicted to peak at 2.8%, but with price pressures beating expectations there is potential for the consumer price index to rise above 3.0%, and potentially stay there for longer, which could persuade the BoE to tighten policy sooner-than-anticipated.
GBP/EUR pushed ahead again on Thursday to strike a 20-day high following sanguine UK retail sales numbers. Smashing expectations of 0.4%, the monthly index came in at 1.4% for February. Analysts questioned the sustainability of the sector due to higher price pressures and flat wage growth but nevertheless the strong print bolstered the appeal of the Pound.
Eurozone Private Sector Hits 6-Year High
Demand for the single currency ramped up on Friday thanks to a six-year high Eurozone private sector PMI report. The Pound to Euro exchange rate softened following the report, which came in at 56.7 for March, up from 56.0 in February. Sterling was also hit by comments from BoE policymaker Gertjan Vlieghe suggesting that he would only start voting for higher interest rates if it emerged that price pressures were building for reasons other than Sterling’s post-Brexit depreciation.
Article 50 To Be Triggered This Week
With little on the economic calendar until Friday, when UK Q4 GDP is expected to be confirmed at 0.7% and Eurozone CPI is tipped to slow from 2.0% to 1.8%, the main event regarding the GBP/EUR rate this week is UK Prime Minister Theresa May’s expected triggering of Article 50 on Wednesday.
The Pound is unlikely to suffer severe losses in response to the announcement because it has been known for a long time and is largely priced into the UK currency. However, we are likely to see volatility in the months ahead in reaction to the ups and downs in the negotiation process.
On the one hand, traders could act with relief when Article 50 is actually triggered, as this would remove one small element of uncertainty. But, on the other hand, it could persuade markets to sell Sterling on fears that UK economic output will slow as Brexit begins to bite.