The Pound to Euro exchange rate softened slightly from a four-and-a-half-month high last week as Italian general elections were averted.
Sterling surged to its highest level against the single currency since July at the beginning of last week’s session in reaction to a referendum on constitutional reform in Italy. Former Prime Minister Matteo Renzi lost the vote and declared he would be stepping down as a result, which sent the Euro reeling as fears of early elections weighed on the single currency. The major concern for traders was the prospect of opposition Five-Star Movement, a party with designs to take Italy out of the European Union, assuming power.
However, after the initial shock wore off, investors calmed their nerves. Elections look unlikely for at least a year now that a technocratic government has been agreed, with former finance minister Paolo Gentiloni set to become caretaker PM.
The extent to which political concerns have overshadowed economic data releases was illustrated clearly at the start of last week’s session when the UK’s dominant service sector posted its strongest score for 10 months but the Pound barely moved an inch following the release.
Tuesday saw UK Chancellor Phillip Hammond soothe investor anxieties by admitting that the government was considering paying into the EU budget in exchange for continued access to the single market. Demand for the Euro increased slightly in response to an unexpected upgrade to Eurozone Q3 GDP from 1.6% to 1.7%.
Sterling softened somewhat on Wednesday when UK industrial production tumbled -1.3%, the fastest pace of decline since 2012, and parliament voted in favour of Downing Street’s plans to invoke Article 50 in March next year.
However, GBP/EUR leapt higher on Thursday as European Central Bank President Mario Draghi said that QE would continue throughout 2017 and was, ‘to an extent, open-ended’. Although the asset purchasing target will be cut from €80 billion to €60 billion, investors interpreted Draghi’s dovish rhetoric and longer-than-anticipated QE extension as a bearish signal for the single currency.
The Pound continued trading higher over the weekend as a couple of new Brexit legal challenges came to light and Italy’s third largest bank came under pressure, leading some to speculate that a government bailout would be required.
With UK inflation set to rise from 0.9% to 1.1%, British unemployment expected to remain at a decade low of 4.8% and the Bank of England tipped to strike a less dovish stance, Sterling appears in good stead to maintain a bullish bias against the single currency this week.
|Data Item||Market Expectation|
|13th December GBP Consumer Price Index (YoY) (NOV)||1.10%|
|13th December EUR Euro-Zone ZEW Survey (Economic Sentiment) (DEC)||15.8|
|14th December GBP ILO Unemployment Rate (3M) (OCT)||4.80%|
|14th December GBP Average Weekly Earnings (3M/YoY) (OCT)||2.30%|
|15th December EUR Markit Eurozone Composite PMI (DEC P)||53.9|
|15th December GBP Retail Sales (YoY) (NOV)||6.00%|
|15th December GBP Bank of England Rate Decision (DEC 15)||0.25%|
|15th December GBP BOE Asset Purchase Target (DEC)||435 bn|
|16th December EUR Euro-Zone Consumer Price Index (YoY) (NOV F)||0.60%|
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