The Pound lost a little bit of ground versus the Euro last week as investors cut rate hike bets following the Bank of England’s latest policy statement.
Macron Relief Rally Fades
The single currency failed to post any lasting gains on news that pro-European centrist Emmanuel Macron had beaten anti-EU far-right leader Marine Le Pen in the French Presidential elections. The Euro strengthened in a knee-jerk reaction but the relief rally didn’t last long. It seems that with the threat of ‘Frexit’ removed, investors returned to a profitable trade of borrowing cheap Euros and then swapping them for higher-yielding currencies.
On Wednesday Sterling touched a 20-day high against the Euro following dovish remarks from European Central Bank President Mario Draghi. Under scrutiny from Dutch MPs, Draghi stuck to his guns and signaled that ultra-loose monetary policy was likely to remain in the Eurozone for the foreseeable future.
Pound Slumps Following BoE Statement
The Pound to Euro exchange rate skidded by around half a cent on Thursday and continued trending lower over the weekend in response to a disappointing BoE policy announcement. Traders had hoped that rising inflation would prompt a hawkish message from the UK central bank, however, only one policymaker voted for higher rates and wage growth and GDP forecasts were downgraded.
Governor Mark Carney struck a fairly upbeat tone on the domestic economy, but refrained from any indication that rates were set to rise imminently. Instead, it was suggested that Britain could see higher borrowing costs in 2019, if Brexit negotiations run smoothly. This wasn’t the hawkish message that traders were looking for and Sterling slumped as a result.
Week Ahead
There are a few interesting ecostats to look out for this week that could drive the Pound higher against the Euro. First up is the UK CPI report, which is tipped to have risen from 2.3% to a new three-year high of 2.6%. This could send Sterling higher, despite the BoE’s recent dovish message.
Eurozone Q1 GDP is predicted to come in at 0.5%. Anything lower than 0.4% could give Sterling a boost, while anything higher than 0.6% would benefit the Euro.
Wednesday’s UK labour market report is tipped to show that unemployment remained at a multi-year low of 4.7%, however, currency traders will probably pay more attention to the average earnings figure. If wage growth improves, as expected, then we could see demand for Sterling increase.