Sterling skidded to an eight-month low versus the single currency last week, depreciating by over two cents as softening UK inflation and European Central Bank tightening speculation drove GBP/EUR lower.
Pound Down as UK Inflation Underwhelms
The Pound to Euro exchange rate plummeted by around a cent last Tuesday following June’s UK consumer price index report, which showed that inflation slowed from a four-year high of 2.9% to 2.6% last month.
The unexpected CPI cooling weighed on Bank of England (BoE) rate hike expectations as policymakers had previously stated that future policy decisions would be data dependent.
GBP/EUR Sinks to 8-Month Low on ECB Tightening Talk
Sterling suffered further steep losses against the single currency on Thursday when European Central Bank President Mario Draghi intimated that policymakers would begin discussing the bank’s stimulus programme in the autumn.
Although the rest of Draghi’s speech had focussed on the need for low interest rates and future bond purchases, markets reacted strongly to the hint of an autumn policy wind down. GBP/EUR plunged -150 pips to strike an eight-month low following the ECB statement.
The Pound was also impacted by Brexit fears following the suggestion from UK trade minister Liam Fox that Britain could get by without a new EU trade deal. The statement was considered reckless by traders, who believe the UK economy would weaken significantly without a new Brexit trade arrangement.
Will GBP/EUR Drift Higher?
Having fallen by over two cents over the past week, GBP/EUR could find itself drifting higher as traders lock-in profit from the eight-month low. For this to happen we will likely need to see some reassuring news on the government’s Brexit negotiations and a sturdy second quarter growth print.
Q2 UK GDP is tipped to have expanded 0.3%, up slightly from the 0.2% growth registered in the first three months of the year. It would probably take a score of 0.4% or higher to give Sterling a material boost, while anything lower than 0.3% could see the Pound sustain further losses versus the Euro.