Dovish sentiments from the European Central Bank helped Sterling rally by around a cent against the Euro last week.
French Presidential Election First Round
The single currency began last week’s session on the front foot as traders interpreted the result of the French Presidential election first round to greatly reduce the probability of France leaving the Eurozone. Centrist Emmanuel Macron is widely expected to beat far-right Marine Le Pen in the second round run off and this initially benefitted the Euro.
GBP/EUR remained lower for most of the week, but Sterling caught a bid on Thursday afternoon when European Central Bank President Mario Draghi poured cold water on hopes of higher interest rates in the currency bloc. Draghi mentioned that economic prospects were improving but argued that ‘a very substantial degree of monetary accommodation’ was still needed to help sustain inflationary pressures.
The Pound rose towards 1.19 following the dovish Draghi remarks and Sterling managed to hold onto most of those gains even after Eurozone CPI jumped from 1.5% to 1.9% on Friday. Sterling was also able to hold fairly steady following news that the British economy decelerated from 0.7% to 0.3% in the first quarter. Rising prices (as a result of the 2016 Sterling depreciation) were seen to have weighed on consumer spending trends in a sign that Brexit is starting to bite.
Week Ahead
Sterling started strongly against the single currency this week thanks to a three-year high UK manufacturing PMI result of 57.3, which significantly outperformed expectations of 54.0. If the Pound is to continue strengthening versus the Euro we will need to see a sturdy service sector print on Thursday. However, the service sector appears to be experiencing a slowdown as a result of rising prices and subsequently the PMI may not print strongly enough to give Sterling a lift.
Also on the agenda is a Eurozone growth report for Q1, which is tipped to see a slight acceleration in economic activity from 0.4% to 0.5%. This would represent faster growth than in Britain at the beginning of the year and could negatively impact demand for GBP/EUR.