The Pound to Euro exchange rate rallied by over three cents last week as the prospect of a November rate hike came into sharper relief.
GBP Rises as UK Inflation Beats Market Expectations
GBP/EUR ticked higher by around 100 pips at the start of last week’s session, buffeted higher by a joint-four-year high UK consumer price index result. British inflation jumped from 2.6% to 2.9% in August, beating forecasts of 2.8% and raising the prospect of tighter policy at the Bank of England (BoE).
On Wednesday UK unemployment printed at a new 42-year low of 4.3%, but Sterling failed to register further gains against the single currency due to subdued wage growth of 2.1%. The fact that wages are lagging behind consumer prices suggests that economic growth could suffer as households rein in spending.
Shock BoE Announcement Sends Sterling Higher
On Thursday demand for the Pound surged across the board following the latest BoE meeting minutes, which revealed that policymakers were considering raising interest rates over the next few months. Governor Mark Carney went on to confirm that the possibility of a rate hike had increased and borrowing costs may need to rise in the coming months. GBP/EUR rallied by around 150 pips following the hawkish central bank statement.
Sterling pushed ahead again on Friday when BoE official Gertjan Vlieghe, who is considered one of the most dovish members of the bank’s rate-setting team, also dropped a rate hike hint. ‘We are approaching the moment when the bank rate may need to rise’, said Vlieghe before going on to suggest that more than one hike was necessary. The Pound appreciated strongly following the comments, rising to a two-month high versus the Euro.
ECB President Mario Draghi Speeches on Tap
The main events to look out for this week are speeches by European Central Bank (ECB) President Mario Draghi. However, markets have largely priced in the prospect of the ECB winding down its stimulus scheme, so it may take a detailed policy proposal, rather than mere hawkish rhetoric, to send the single currency higher at this juncture.
In the UK a report on retail sales is due for release on Wednesday but the anticipated 1.4% print is unlikely to have a massive impact on GBP/EUR. Rising BoE rate hike expectations are liable to prop the Pound up through the week.