The Pound to Euro exchange rate appeared to bottom out at an eight-month low last week, before rallying over a cent as central bank speculation benefitted Sterling.
GBP/EUR Slides to 8-Month Low
Sterling plunged to an eight-month low versus the single currency last Tuesday following a speech from Bank of England policymaker Ben Broadbent. Traders were hoping for a hawkish message from the BoE official, but Broadbent opted instead to focus on the trade dynamics of Brexit.
Markets interpreted the omission of any policy views as a sign that Broadbent has not changed his mind since June, when he voted against raising rates.
However, GBP/EUR started to rise again on Wednesday, suggesting that the downtrend from April could have bottomed out. Between April 21 and July 12, Sterling had weakened by around nine cents against the Euro.
Domestic data showed that UK unemployment struck a new 42-year low of 4.5% in May but a drop in average earnings from 2.1% to 1.8% curtailed Sterling sentiment. With UK inflation running at a four-year high of 2.9%, British growth prospects remained dampened by negative real wage growth.
Hawkish BoE Remarks Boost Pound
The Pound rallied by over half a cent on Thursday following hawkish comments from BoE policymaker Ian McCafferty suggesting he would be voting for higher rates in August.
McCafferty noted his position had not changed since June (when he voted for a rate hike) and went on to suggest that Threadneedle Street should begin unwinding its £435 billion QE balance sheet sooner rather than later.
On Friday, a trio of unnamed policymakers at the European Central Bank told reporters that they were keen to leave the bank’s QE scheme open to further increases, just in case economic conditions were to deteriorate later down the line. This weighed on the single currency, helping GBP/EUR strengthen by around 80 pips to strike a three-week high.
The Pound was also boosted by the British government’s constructive tone on Brexit, with investors viewing a number of UK concessions as a hopeful sign that Britain will not walk away from the negotiating table without first agreeing a new trade deal with Europe.
UK Inflation Data, ECB Rate Decision Ahead
The two main events to look out for this week are the UK inflation report and the ECB’s policy decision.
British inflation is tipped to remain at a four-year high of 2.9%, which although negative for consumer spending and growth prospects, is likely to put pressure on policymakers at the BoE to start raising rates at some point in the future. A reading of 3.0% or higher would certainly boost hike bets and subsequently Sterling, while a reduction in CPI could see GBP/EUR dip.
No policy changes are expected at the ECB this week, however, any clues on future direction could cause significant market tremors. A hawkish message would likely drive the single currency higher, while cautionary rhetoric could weigh.