Updated: Euro Weakened by Larger than Expected Decline in German Factory Output
The Pound Euro exchange rate continues to trend higher this morning, extending the gains made at the start of the week as the single currency was pressured by a notable decline in German Industrial production.
According to figures published by Destatis German factory output plummeted from 2.6% to -1.6% in September, tumbling below expectations that production would have only fallen to -0.8%.
However with data this morning also showing that Eurozone retail sales preformed stronger than predicted in September, the single currency may be able to claw back some losses by the end of the session.
Sterling Softens Following ‘Dovish BoE Hike’
GBP/EUR rose to its highest level in four months last week as mounting Bank of England rate hike bets drove the Pound higher.
However, demand for Sterling softened following the BoE announcement as investors locked in profit from the four-month high and reacted to dovish commentary from the central bank.
While the BoE raised rates 25 basis points to 0.50%, Governor Mark Carney noted that only ‘very gradual’ increases were planned over the next three years.
The Governor went on to confirm that the BoE agrees with market expectations that rates will only rise by a further 50 basis points between now and 2020.
The announcement was seen as a ‘dovish hike’ and Sterling plummeted versus the single currency during Thursday’s session.
GBP/EUR Focus Shifts from BoE to Brexit
The Pound proceeded to bounce higher following the initial disappointment when the BoE hinted that no further rate hikes were planned over the next 12 months.
A better-than-anticipated UK service sector score of 55.6 on Friday lent Sterling some support but there is little market moving data due for release during this week’s session.
This means GBP/EUR sentiment is likely to focus on Brexit: any positive developments could drive the Pound higher, while any setbacks could give the Euro a boost.
It’s worth keeping an eye out for European Central Bank President Mario Draghi’s speech on Tuesday morning and the UK manufacturing production report on Friday morning, but considering both the ECB and BoE recently outlined policy plans the market impact could prove limited.
The scandals engulfing Westminster could also have an impact on the currency market this week. Following the resignation of defence secretary Michael Fallon, any further cabinet exits could seriously weaken Prime Minister Theresa May’s position and potentially lead to a new leadership contest and another general election.
This added uncertainty would likely unsettle the Brexit process and weigh on demand for the Pound.
EUR Data Released This Week
7th November EUR ECB’s Draghi, Lautenschlaeger, Nouy Speak in Frankfurt
7th November EUR Eurozone Retail Sales (YoY) (SEP)
10th November GBP Industrial Production (YoY) (SEP)
10th November GBP Manufacturing Production (YoY) (SEP)
10th November GBP Visible Trade Balance (Pounds) (SEP)