The Pound to Euro exchange rate is trading at its lowest level for almost two months due to concerns that UK Prime Minister Theresa May is planning to put immigration controls ahead of retaining access to the single market – a so-called ‘hard Brexit’.
Last week’s session saw all three UK PMI reports come in stronger-than-anticipated. Manufacturing output printed at a two-and-a-half-year high of 56.1, due to strong improvements in new orders both domestically and from abroad. Markit Economics reported that construction activity jumped from 52.8 to 54.2, thanks to a ‘robust and accelerated’ expansion in the sector. Meanwhile the dominant UK service industry, which accounts for over 70% of British GDP, smashed forecasts of 54.7 with an upbeat score of 56.2.
Overall, the positive prints signalled that the private sector witnessed its biggest expansion for 17 months in December and suggest that the economy grew by around 0.5% in the fourth quarter. However, Sterling failed to rally on the figures because economists cautioned that the Pound’s -15 % depreciation in 2016 would push prices higher in 2017 and subsequently decrease consumer spending, constraining GDP growth.
The single currency was also supported by a couple of decent Eurozone ecostats showing that inflation in the currency bloc rose to a three-year high of 1.1% in December and that retail sales increased 2.3% in November.
The main blow for the Pound, however, took place over the weekend when UK PM Theresa May said that leaving the EU was about ‘getting the right relationship, not about keeping bits of membership’, which most analysts interpreted as a sign that the government is willing to give up single market access in exchange for greater controls on immigration.
Sterling plunged -150 pips following the remarks to hit its lowest level in almost two months.
With little significant data releases due this week GBP/EUR is liable to fluctuate in response to Brexit sentiment.
The Pound suffered big losses in October when May initially suggested that Britain could opt to tighten immigration at the expense of single market membership. However, Sterling managed to claw back those losses thanks to soothing comments from government officials that appeared to backtrack on so-called ‘hard Brexit’ plans and left the door open to a ‘soft Brexit’ that would include access to the single market.
If ministers can convince investors that a ‘soft Brexit’ is still on the cards then we could see the Pound rebound swiftly. However, if the government sticks to the ‘hard Brexit’ rhetoric then we could see further losses as jittery investors pull out of the Pound.
|Data Item||Market Expectation|
|11th January GBP Industrial Production (YoY) (NOV)||0.60%|
|12th January EUR Eurozone Industrial Production w.d.a. (YoY) (NOV)||1.50%|
|12th January GBP Bank of England Governor Carney to testify to Lawmakers|
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