The Pound to Euro exchange rate rallied by over two cents last week as investors bought into Sterling following the triggering of Article 50.
UK PM Theresa May Triggers Article 50
The Pound got off to a slow start last week, with GBP/EUR sliding below 1.15 ahead of UK Prime Minister Theresa May’s official notification that Britain was to leave the European Union on Wednesday.
However, currency traders responded positively to the conciliatory tone of the initial communication between European leaders and Theresa May once the Brexit process had officially begun. May accepted that the UK would not be able to ‘cherry pick’ benefits of the single market and noted that Britain remains a part of the European community. German Chancellor Angela Merkel promised to take a ‘fair and constructive’ approach to future trade talks and European Council President Donald Tusk even quipped ‘we already miss you’ in response to May’s letter of notification.
The cordial tone and lack of divisiveness was seen to bode well for the trade negotiations and this prompted a rise in demand for Sterling. Although the Pound could easily run into trouble if UK-EU relations start to deteriorate, some analysts believe that British economic output could accelerate over the next two years as businesses stockpile, and consumers carry on spending, while Britain still retains access to the single market. The theory is that purchases will be brought forward to avoid higher costs when the two-year divorce process is over and potential tariffs are imposed.
Single Currency Down As Inflation Slows
GBP/EUR rallied by around a cent on Thursday to hit its highest level since the start of March as German inflation slowed from 2.2% to 1.6%. Sterling pushed ahead further on Friday when the Eurozone-wide CPI print tumbled from 2.0% to 1.5%. The slowdown in price pressures in the currency bloc reduced demand for the Euro because it was seen to decrease the chances of the European Central Bank tightening monetary policy anytime soon.
UK data on Friday showed that the British economy expanded 0.7% in the fourth quarter of 2016. A drop in the savings rate from 5.3% to an all-time low of 3.3% concerned some traders, as this could pre-empt a reduction in consumer spending. However, sentiment was boosted by a surprise reduction in the current account deficit. The Q3 deficit of -£25.7 billion was halved to -£12.1 billion in Q4, bringing the current account deficit to just 2.4% of GDP.
Week Ahead
So long as UK private sector data doesn’t show any surprising dips in output then Sterling is liable to hold onto its recent gains versus the Euro.
ECB President Mario Draghi is due to speak on Tuesday and, in light of the slowdown in European CPI, it is possible that Draghi could attempt to play down expectations of any form of monetary tightening in 2017, which would likely put a little bit of pressure on the single currency.