The Pound rallied to a 10-week high versus the Euro last week, but demand has since softened on soft ecostats and concerns over Brexit.
German Election Results Weaken Single Currency
At the start of last week’s session demand for the Euro dipped following the German election.
Although Chancellor Angela Merkel won a fourth term in office, her Christian Democratic Union party received its lowest vote count since the Second World War.
This left Merkel with the difficult task of having to form a coalition with a variety of parties who share little political common ground. Analysts warn that the coalition negotiations could last for weeks or even months, and this political uncertainty drove the single currency lower.
GBP/EUR struck a 10-week high on Wednesday but profit-taking kicked in after that and Sterling started to give up its gains.
Negative UK GDP Revision Weighs on Pound
Demand for Sterling dipped further on Friday when second quarter annualised UK growth was revised down from 1.7% to 1.5%. The quarterly figure remained at 0.3% but the downgrade was not seen to bode well for future economic prospects.
Indeed, subsequent data showed that UK manufacturing output slowed in September, with the PMI slipping unexpectedly from 56.7 to 55.9. Even more concerning was news that construction activity actually shrank for the first time in 14 months during September, with the PMI coming in at 48.1, down from 51.1 in August.
If Wednesday’s dominant service sector report also prints in negative territory then we could see an even bigger drop in demand for GBP/EUR.
Political & Brexit Uncertainty Cloud Sterling Outlook
In addition to a raft of downbeat ecostats, the Pound has also suffered from renewed political uncertainty.
UK foreign secretary Boris Johnson recently outlined his own four ‘red lines’ that Britain should not cross on Brexit, in a move that many saw as an attempt to undermine Prime Minister Theresa May, who recently outlined her own strategy for Brexit.
Some political commentators believe that Boris’ timing – on the eve of the Tory party conference – suggests that he is considering launching a leadership bid. The threat of additional uncertainty appears to be weighing on Sterling and could continue to do so over the next week, or until the situation between Boris and the PM is resolved.