The Pound to Euro exchange rate remained close to two-month highs during last week’s session but markets were not impressed by UK Prime Minister Theresa May’s Brexit speech. Sterling recovered following the results from general elections in Germany.
Sterling Settles After BoE Governor Mark Carney’s Statement
Demand for the Pound softened last Monday following a speech from Bank of England (BoE) Governor Mark Carney stressing that any prospective interest rate rises would be ‘gradual and limited’. The sober comments calmed a little of the hysteria around soaring expectations for a near-term rate hike and prompted a bout of profit-taking in GBP/EUR.
The Pound gained support on Wednesday following a sanguine retail sales report signalling 2.8% yearly growth in August – double the median market consensus of 1.4%. The robust increase in sales volumes was especially impressive considering that consumers have been faced with months of negative real wage growth (inflation outstripping earnings).
Theresa May’s Brexit Speech Fails to Follow Through on Expectations
Sterling initially pushed ahead against the Euro in the run-up to UK Prime Minister Theresa May’s Brexit speech. Rumours suggested that May was going to offer €20 billion to maintain access to the EU’s single market during the proposed two-year transition period. The single currency, meanwhile, was hurt by a lack of policy talk in European Central Bank (ECB) President Mario Draghi’s latest public statement.
However, demand for the Pound tumbled after PM May’s Brexit address, because investors concluded there had not been enough clarity on Britain’s future trading relationship with the EU. May stated that she intended to keep single market access until March 2021 but did not say how much Britain would pay in exchange. The PM called for a ‘creative’ new trade agreement but did not give enough details to assuage market concerns that UK trade will suffer as a consequence of Brexit.
Indeed, Moody’s cited Brexit as a threat to UK public finances and economic growth when cutting Britain’s credit rating from Aa1 to Aa2. The Pound, however, remained largely unmoved by the decision as most analysts had already priced a Brexit slowdown into their valuations of Sterling.
German Election Result Weighs on Euro
The Pound rebounded versus the Euro at the start of this week’s session due to political uncertainty in Germany. Chancellor Angela Merkel won a fourth term in office but, despite expectations of an easy victory, received her party’s lowest vote count since 1949. Merkel now needs to form a new coalition, as her current partner the SPD has gone into opposition, and political commentators believe the difficult talks could last for weeks or even months.
Depending on the success of Merkel’s talks with other parties, we could see the single currency remain under pressure this week as uncertainty reigns. Also on the agenda is the final revision to UK GDP growth in the second quarter, which is predicted to print at 0.3%. Anything above 0.3% could bolster Sterling, while anything below could act as a drag.