This week’s third quarter UK GDP report could limit gains in the Pound to Euro (GBP/EUR) exchange rate.
Sterling Softens Despite Sturdy CPI
Last week the Pound to Euro exchange rate slid by around half a cent despite data showing that UK inflation struck a five-year high of 3.0% and British unemployment remained at a 42-year low of 4.3%.
Falling retail sales (-0.7% MoM) appeared to impact demand for Sterling, as did caution surrounding the Bank of England’s desire to raise rates in November.
Market futures rates dipped last week, suggesting the probability of monetary tightening on November 2 has dropped from 70% to 65%. This could simply reflect market jitters ahead of the event, but it could also speak to wider fears surrounding the UK economy.
UK Third Quarter GDP to Drive GBP Exchange Rates
On Wednesday the Office for National Statistics (ONS) is due to release its first estimate of UK third quarter GDP growth. Traders are forecasting yearly expansion of 1.5% and quarterly growth of 0.3%, which would match the expansion recorded in Q2.
Anything lower than this could derail November BoE rate hike expectations and subsequently drive Sterling lower, while a more optimistic print would likely bolster sentiment.
Also on the agenda is the European Central Bank’s policy decision on Thursday. While the ECB is unlikely to tighten policy at this juncture, there is potential for the single currency to rally if President Mario Draghi strikes a hawkish tone during his press conference.
On the other hand, recent remarks over the soft inflationary outlook suggest Draghi could stick to a tone of caution, which would probably give rise to mild GBP/EUR gains.
Potential for GBP Exchange Rate Gains Limited as Brexit Uncertainty Remains
Of course, the biggest uncertainty around the Pound to Euro exchange rate is the Brexit process.
Optimistic comments last week appeared to suggest that the EU was willing to start discussing future trade ties in December, even if UK Prime Minister Theresa May doesn’t manage to finalise the divorce bill before then (because EU officials know that stating a high EU payment prematurely could put May under intense pressure at home). However, the scrutiny surrounding May’s premiership could easily erupt at any moment.
With ambitious senior Tory figures sensing weakness, the potential for Sterling to slide on a leadership challenge remains a key concern.
Data Released This Week
24th October EUR Markit Eurozone Composite PMI (OCT P)
25th October EUR German IFO – Business Climate (OCT)
25th October GBP Gross Domestic Product (QoQ) (3Q A)
25th October GBP Gross Domestic Product (YoY) (3Q A)
26th October EUR European Central Bank Rate Decision (OCT 26)
26th October EUR ECB Press Conference