The Pound to Euro exchange rate struck a four-month high at the beginning of this week’s session due to fears that political instability in Italy could pave the way for a wave of anti-EU sentiment on the continent.
GBP/EUR started the week at around 1.17 as Bank of England policymaker Gertjan Vlieghe said that no further interest rates were needed and European Central Bank President Mario Draghi hinted that the ECB’s QE scheme would be enhanced sooner rather than later.
The Pound failed to hold above psychological resistance at 1.18 on Tuesday, even though Sterling had initially rallied on news that bets against the UK currency slumped to the lowest level since September.
News that OPEC had agreed to curb oil production in order to drive crude prices higher boosted the Pound on Wednesday due to rising UK inflation expectations. During the morning Eurozone CPI printed at a 31-month high of 0.6% but it was not enough to prevent the single currency suffering from ECB easing projections.
Sterling surged to a two-month high north of 1.19 on Thursday thanks to comments from Brexit secretary David Davis suggesting that the UK government was prepared to pay into the EU budget in order to retain access to the single market.
GBP/EUR rose above 1.20 briefly over the weekend in reaction to Italian Prime Minister Matteo Renzi’s resignation following defeat in a referendum on constitutional reform.
Having rallied to a four-month high above 1.20 during the early hours of Monday morning, GBP/EUR has since settled back closer to the 1.19 mark. Initially, demand for the single currency was markedly weakened by Italian PM Renzi’s resignation announcement, as this was seen to pave the way to early elections that could potentially see the anti-EU Five-Star Movement take control of the Eurozone’s third largest economy. However, traders have since calmed their bets of an untimely EU exit due to expectations that a technocratic government could be installed swiftly to prevent new elections.
Looking ahead and the potential for Sterling to rally back above 1.20 rests on three main events.
1. If Italy announces early elections then existential Euro fears could drive the single currency lower.
2. The UK Supreme Court Brexit ruling could boost the Pound if judges decide to uphold an earlier ruling that PM Theresa May cannot invoke Article 50 without parliamentary consent. Sterling is liable to weaken if the government wins its appeal to start the EU divorce process without outlining its plans to MPs.
3. The ECB is likely to extend its quantitative easing scheme past the current expiration date of March 2017, which could weigh on the Euro depending on how dovish the bank’s new message is.
|Data Item||Market Expectation|
|5-8th December GBP UK Supreme Court Hears Government-Parliament Brexit Appeal|
|7th December GBP Industrial Production (YoY) (OCT)||0.30%|
|7th December GBP NIESR Gross Domestic Product Estimate (NOV)||0.40%|
|8th December EUR European Central Bank Rate Decision (DEC 8)||0.00%|
|8th December EUR ECB Asset Purchase Target (DEC)||EUR 80bn|
© TorFX. Unauthorised copying or re-wording of this blog content is prohibited. The copyright of this content is owned by Tor Currency Exchange Ltd. Any unauthorised copying or re-wording will constitute an infringement of copyright.