The Pound to Euro exchange rate has fallen by around two cents over the last week due to concerns that the Bank of England may not raise interest rates even though inflation looks to be eroding domestic growth prospects.
Pound Slides As CPI Hits 3.5-Year High
Sterling fell by around half a cent against the single currency at the start of last week’s session following a report suggesting that UK unemployment could jump from 4.7% to 5.4% next year.
British inflation printed at a three-and-a-half-year high of 2.7% on Tuesday, beating expectations of 2.6%. However, GBP/EUR failed to rally on the figure because recent comments from the BoE suggest that rates are likely to remain at rock-bottom levels until 2019. This meant that the higher CPI print was viewed through the prism of consumer spending, and therefore was interpreted as a bearish print for the Pound because higher prices are liable to reduce retail spending.
The Pound traded flatly against the Euro on Wednesday as UK unemployment struck a 42-year low of 4.6% but wage growth slowed to 2.1%.
Sanguine Retail Sales Give Sterling Temporary Boost
British retail sales confounded expectations of a 1.0% rebound with a 2.0% expansion in April. The upbeat number gave Sterling a boost, as some traders bet that Britain’s post-Brexit resilience could continue despite falling real wages. However, a mini flash crash during the evening saw GBP/EUR’s gains cut short.
The single currency registered further gains on Friday as markets responded with relief to news that Greek MPs had agreed on new austerity measures in exchange for another batch of much-needed financial aid.
Week Ahead
So far this week we’ve seen the Euro rally against the Pound in response to comments from German Chancellor Angela Merkel appearing to criticise the European Central Bank’s quantitative easing scheme and suggesting the single currency should be stronger.
Sterling was also impacted by news that unpopular Tory policies, such as the so-called ‘dementia tax’ and the removal of free-school meals, had reduced Theresa May’s lead over Jeremy Corbyn from 20-points to around 9-points. The Conservative social care backlash has caused investors to reevaluate the assumption that June’s election would see a landslide victory for Theresa May, thus strengthening her hand in the upcoming Brexit negotiations.
Looking ahead it will be interesting to see how currency markets react to the latest political developments ahead of the general election in just over two weeks’ time. Traditionally, Sterling has rallied in response to strong Conservative polling figures, but generally the rallies do not last and the Pound tends to slide in the first week following a Tory victory.
On the other hand a Labour victory would surprise markets and could lead to Sterling selling, but in the long-run Labour’s softer stance on Brexit could bolster demand for the Pound.