The Pound to Euro exchange rate hit a series of 4-month lows last week as UK inflation pressures eased, paving the way for more quantitative easing measures from the Bank of England. Euro sentiment was also improved as Spain looked set to request financial aid and, although this hasn’t happened yet, this notion contributed to GBP/EUR’s 1.5 cent weekly decline.
Sterling held above the 1.2400 mark for most of the day on Monday as markets appeared to be mildly put-out by the news that the Troika – of inspectons from the EU, IMF, and EC – have delayed making a decision on Greece’s finances until mid November.
However the Pound did not stand up so well on Tuesday morning when it was announced that inflation in the UK fell to its lowest level in almost 3 years during September. The UK Consumer Price Index slid to 2.2%, marking a 0,3% decline, which was interpreted as negative for the UK currency as it increased the likelihood of the Bank of England returning to their quantitative easing cycle in November.
Sterling’s woes were exasperated later on in the day as leaders from Spain commented that a potential Spanish bailout programme could save the Iberian nation around €9 billion a year, which is equivalent to 1% of GDP. The optimistic report also suggested that Spain’s borrowing costs could drop by over 1.5% in the first 24 hours of European Central Bank intervention and this contributed to GBP/EUR 1 cent daily decline.
Wednesday saw some good news for the UK economy, as the ILO Unemployment Rate fell to a 15-month low of 7.9% and the Claimant Count decreased by -4,000, but this did not translate into a positive performance for the Pound against the Euro. With markets rallying wildly around the world and Spanish 10-year debt yields declining by -28.2 basis points, Sterling was unable to compete with the single currency despite the minutes from the latest BoE meeting showing that there are disagreements over the effectiveness of further asset purchases.
On Thursday more UK economic good news was overshadowed by developments in the Eurozone. UK Retail Sales printed stronger-than-expected at 2.9%, reflecting positively on the British economy and reducing the chances of more QE, but the Pound was punished in the evening as British Prime Minister David Cameron struck an alienating tone with reference to the UK’s EU membership. Subsequently GBP/EUR decreased by 0.5 cents.
The single currency was unable to appreciate further against the Pound on Friday as UK Public Borrowing figures showed that the budget deficit is shrinking, and markets interpreted the conclusion to the EU summit in Brussels as disappointing. Investors were looking for decisive action regarding the proposed plan to recapitalise struggling Eurozone banks, but Germany’s tough stance on structural reforms ensured that no concrete developments were made.
Looking ahead at this week’s schedule and the economic docket is fairly sparse. German and Eurozone Manufacturing and Services PMI figures are due to be released on Wednesday morning and should show the mildest of mild improvements in output. The only other standout event is the release of the UK’s third quarter earnings print. GDP is predicted to have grown by 0.6% during the last quarter, bringing Britain out of recession for the first time in 6 months.
In terms of the Pound to Euro exchange rate, significant resistance has formed between 1.2310 and 1.2330 and for this to be broken we will either have to see a poor set of Eurozone PMI prints, an exceedingly good UK GDP report, or a shift in market sentiment away from a Spanish bailout request.
The Euro is deriving a lot of its current strength from the agreement among market-players that Spain is about to trigger ECB intervention in the sovereign debt market by requesting financial aid. However if Spanish PM Mariano Rajoy continues to stall, then a combination of UK economic growth and Eurozone jitters could cause GBP/EUR to grow.
Summary of major upcoming data releases that we think may move the market.
|Date||Time||Issuing country/region||Data Item||Market Expectation||Market Sensitivity|
|October 24th||07:30||EUR||EUR German Purchasing Manager Index Services (OCT A)||50|
|October 24th||07:30||EUR||EUR German Purchasing Manager Index Manufacturing (OCT A)||48|
|October 24th||08:00||EUR||EUR Euro-Zone Purchasing Manager Index Composite (OCT A)||46.5|
|October 24th||08:00||EUR||EUR Euro-Zone Purchasing Manager Index Services (OCT A)||46.4|
|October 24th||08:00||EUR||EUR Euro-Zone Purchasing Manager Index Manufacturing (OCT A)||46.5|
|October 25th||08:30||GBP||GBP Gross Domestic Product (QoQ) (3Q A)||0.6%|
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