The Pound to Euro exchange rate failed to post any lasting gains last week and fears of further UK political stability threaten to drag Sterling lower.
UK Production, Trade and GDP Data Improves, Sterling Supported
GBP/EUR ticked a little higher at the end of last week’s session, boosted by higher-than-anticipated UK manufacturing and industrial production, lower-than-expected trade deficit figures and an estimated acceleration in GDP from 0.4% to 0.5%.
However, the positive ecostats only had a limited impact on Sterling as a number of political developments over the weekend were seen to increase the risk premium on UK assets.
May’s Government in Tatters: GBP Exchange Rates Slide
Sterling sentiment was hit by a news report in the Sunday Times suggesting that 40 Conservative MPs were ready to sign a letter of no-confidence in Prime Minister Theresa May.
Although this falls short of the 48 required to trigger a leadership contest, the news unsettled traders as further political volatility would almost certainly negatively impact Brexit negotiations.
Matters were made worse by another leaked letter, this time from foreign secretary Boris Johnson and environment secretary Michael Gove, imploring the PM to pursue a tougher stance with the EU on Brexit.
The letter was widely seen as an affront to May’s authority and it will be interesting to see whether the PM risks unsettling her cabinet further by disciplining the pair, or opts to let it slide, which would make her appear weak.
Political commentators believe that May’s premiership is at its most fragile since the botched general election.
Data Affecting This Week’s GBP/EUR Exchange Rate Forecast
14th November GBP Consumer Price Index (YoY) (OCT)
14th November EUR Draghi, Yellen, Carney, Kuroda Speak in Frankfurt
14th November EUR Eurozone Gross Domestic Product s.a. (QoQ) (3Q P)
15th November GBP ILO Unemployment Rate 3Mths (SEP)
16th November EUR Euro-Zone Consumer Price Index (YoY) (OCT F)
16th November GBP BOE’s Carney, Broadbent, Cunliffe, Place, Ramsden, Woods Speak
17th November EUR ECB’s Draghi Speaks in Frankfurt
Pound Euro Forecast: UK Inflation Data Could Lend GBP/EUR Support
The big data point to look out for this week is October’s UK CPI report on Tuesday, which is expected to see price pressures accelerate from 3.0% to a new five-year high of 3.1%.
If inflation continues to tick higher it could persuade the Bank of England to act with additional rate hikes sooner-than-anticipated.
However, the market reaction could be muted if investors continue to focus on speculation that Theresa May could be ousted.
Also on the agenda is UK unemployment, which is tipped to remain at a multi-decade low of 4.3%, Eurozone CPI, which is expected to slow from 1.5% to 1.4% and a number of speeches from UK and European policymakers, which will be scoured for clues on future policy.
Unless Theresa May manages to steady the ship and make some progress in Brexit talks, it looks likely that GBP/EUR could weaken over the coming days – even if UK CPI strikes a new five-year high.