The Pound weakened by around a cent against the Euro last week as traders hedged against political uncertainty in Britain.
Merkel Criticises ECB QE
Sterling slid by around half a cent against the single currency last Monday when German Chancellor Angela Merkel commented that the Euro was ‘too weak’ and blamed the European Central Bank’s large-scale quantitative easing scheme for keeping the single currency down.
GBP/EUR remained softer on Tuesday as UK government borrowing printed at £10.4 billion compared to forecasts of £8.9 billion and Eurozone manufacturing output came in at 57.0 compared to calls for 56.5.
UK GDP Disappoints, Corbyn Rises In Polls
The Pound continued on the back foot on Thursday, tumbling by another 50 pips as UK GDP was revised lower from 0.3% to 0.2% in the first quarter. Traders were concerned that net exports fell 1.4% even though the Pound’s post-Brexit depreciation had made British exports more affordable to foreign buyers.
Sterling suffered further losses on Friday as investors reacted to a poll showing that Theresa May’s lead over Jeremy Corbyn had been cut from 20 points to 5 points in less than a month. Markets had been anticipating a landslide Tory majority, which many believed would strengthen Theresa May’s hand in the upcoming Brexit negotiations. However, the latest polls point to a much closer vote and the Pound slumped as traders hedged against the possibility of a hung parliament.
Week Ahead
Having struck a two-month low on Friday, GBP/EUR has already started drifting higher this week. The single currency was hurt by comments from ECB President Mario Draghi calling for sustained loose monetary policy and by fears that Greece could default on its next bond repayments if the EU and the IMF do not agree on debt relief next month.
On the agenda this week we have Eurozone CPI, which is tipped to cool from 1.9% to 1.5% in May and could weigh on demand for the Euro, and a UK manufacturing PMI report, which is likely to remain in the region of 56.5-57.5.
The scarcity of market-moving ecostats means that UK election jitters could continue to dominate. Sterling is liable to soften if the Conservatives’ lead continues to decline, however, we could certainly see a rebound in demand for the Pound if Labour or a coalition of centre-left parties were to come into power as this would likely result in a softer approach to Brexit.