The Pound to Euro exchange rate held steady for most of last week’s session as hawkish remarks from the President of the European Central Bank and the Governor of the Bank of England cancelled each other out.
Tory-DUP Deal Fails to Lift Sterling
Last Monday Theresa May announced that her Conservative party had signed a deal with the Northern Irish Democratic Unionist Party to secure the necessary votes to prop-up her minority government.
The announcement gave the Pound a knee-jerk boost as one small layer of uncertainty was removed from the equation, but investors quickly assessed that May’s botched election campaign meant she was susceptible to a potential leadership challenge from within the Tory party at any time.
Euro Jumps as ECB’s Draghi Appears to Strike Hawkish Tone
On Tuesday ECB President Mario Draghi argued that the bank’s large-scale quantitative easing programme had helped boost economic growth in the Eurozone by 1.7% since January 2015.
However, Draghi appeared to signal that the programme could be softened in the foreseeable future, calling for a ‘considerable degree of stimulus’ rather than the ‘very substantial stimulus’ he described last time out. In the world of central banking, even the smallest shifts in language are taken very seriously and GBP/EUR tumbled by around a cent to touch a seven-month low following the statement.
However, the next day the single currency softened as sources at the ECB commented that markets had misinterpreted Draghi’s remarks. It was argued that the ECB chief was explaining that he would tolerate weak inflation, rather than signaling that policy would be tightened imminently.
BoE’s Carney Boosts Sterling with Talk of Removing Stimulus
The Pound stormed ahead on Wednesday in response to a hawkish shift in rhetoric from BoE Governor Mark Carney.
In contrast to a speech a week earlier in which he stated now was not the time to raise interest rates, Carney said ‘some removal of monetary stimulus is likely to become necessary’, which bolstered rate hike expectations and allowed Sterling to recover against the Euro.
GBP/EUR remained flat for the remainder of the week as hawkish sentiments from the BoE’s Andy Haldane were equalled out by a couple of higher-than-anticipated inflation prints from Germany and the Eurozone as a whole.
UK Service Sector PMI Ahead
The most important event on the economic calendar this week appears to be the June UK service sector PMI on Wednesday.
British manufacturing growth disappointed on Monday and we could see an unwinding of BoE rate hike bets if the hugely influential service sector also underwhelms.
Services activity accounts for over 70% of domestic growth, so the importance of the result cannot be overstated.
A strong number above 54.0 could boost Sterling, while the single currency would likely benefit if the indicator prints below 53.0.