The Pound to Euro exchange rate softened by around half a cent last week as investors digested contrasting statements from important Bank of England (BoE) policymakers.
The Governor Backs Loose Policy
Sterling sunk around 100 pips against the single currency last Tuesday following a dovish speech from BoE Governor Mark Carney. Citing ‘anaemic wage growth’, a slowdown in consumer spending, subdued inflation and Brexit uncertainty, Carney said that now was not the right time to start raising interest rates. The speech acted as a reality check for the Pound, which had mounted a rally a week earlier when three policymakers voted for tighter policy in June.
Prior to Carney’s comments Chancellor Philip Hammond spoke of the importance of agreeing a transitional Brexit deal that would prolong Britain’s current trading relationship with the continent past the 2019 deadline. Hammond also mentioned that the UK would seek a comprehensive agreement for trade and a frictionless customs arrangement, while appearing to move away from the idea that no deal would be better than a bad deal. Traders were happy with Chancellor Philip Hammond’s softer approach to Brexit but the story was swiftly overshadowed by Carney’s dovish speech.
BoE Chief Economist Turns Hawkish
GBP/EUR recovered around 50 pips of its losses on Wednesday when BoE chief economist Andy Haldane shocked markets with talk of raising rates later this year. Previously considered one of the most dovish members of the monetary policy committee, Haldane intimated that he would be voting for tighter borrowing conditions later in the year, so long as economic data performs as expected. Markets priced in a 50% chance of a rate rise in 2017 following the statement.
The mixed signals from the UK central bank suggest that policymakers may be attempting to stick to a delicate balancing act of propping up the Pound with hawkish sentiments to prevent inflation spiralling out of control, while at the same time leaving policy loose to boost business investment and foster liquidity.
Softer Brexit Approach Supports Sterling
Sterling drifted a little higher on Thursday in response to news that Theresa May was planning to offer EU citizens living in the UK the right to stay. The amicable offer was seen as an attempt to remove one layer of friction from the talks, and was viewed as being representative of a softening of the UK’s negotiation approach. However, the positive impact of the decision was compromised somewhat by European Council President Donald Tusk’s assessment that the offer was below Europe’s expectations and would worsen the situation for EU citizens.
Currency Forecast for the Week Ahead
The main event to look out for this week is BoE Governor Mark Carney’s financial stability report, which could see the UK central bank rein in some of its liquidity boosting measures that were introduced to quell market fears following last year’s shock Brexit referendum. Any indication that the Governor could be open to removing stimulus could support the Pound, while any dovish sentiments could weigh on GBP/EUR.
Also on the agenda is the discussion of the Queen’s Speech in parliament. If Theresa May’s plans do not receive the necessary votes then the government will almost certainly fall, thus plunging Britain into a new level of political uncertainty. This would likely lead to another leg lower for Sterling.
However, Theresa May has now agreed a deal with the Democratic Unionist Party (DUP) to give the Conservatives the number of seats needed to form a government. So unless the PM suffers from a Tory rebellion, the Queen’s Speech should pass the vote of confidence.