Over the past week two major events have colluded to halt the Pound’s impressive performance against the Euro. The Pound to Euro exchange rate started last week at a three-and-a-half year high of 1.2892, but weaker-than-expected second quarter GDP data and strong words from Mario Draghi allowed the Euro to recover by a cent.
On Monday the Euro managed to grow by 0.8 cents against the Pound as the IMF issued a statement to confirm that they are still offering financial assistance in accordance with Greece’s economic recovery programme. Eurozone Consumer Confidence fell to a 3-year low of -21.6, but markets were preoccupied with the situation in Greece and this result was mostly overlooked.
On Tuesday soft economic data did nothing to support the single currency, with the French Business Confidence Indicator dropping from 91 to 90, German Manufacturing PMI stumbling from 45.0 to 43.3, German Services PMI sliding from 49.9 to 49.7 and Eurozone Manufacturing PMI falling from 45.1 to 44.1. The Euro gave back Monday’s gains and GBP/EUR rose to 1.2872 in the afternoon. The 17-nation bloc was also negatively impacted by Moody’s decision to downgrade the outlook for Germany, Luxembourg and the Netherlands from AAA stable to AAA negative.
Wednesday saw the Pound decline by around 0.75 cents against the Euro as the second quarter GDP figure sent shock-waves around the UK, as it became clear that the situation in Britain is worse than was first thought. GDP shrank by -0.7% in the last quarter marking the third consecutive three-month period of decline.
Towards the end of the week Mario Draghi gave a press conference in which he hinted that the soaring bond yields in Italy and Spain could fall under the mandate of the European Central Bank. He then pledged to do “whatever it takes to preserve the Euro,” which gave investors the push they needed to initiate strong risk rallies across the globe.
The Pound started this week’s trading just below 1.2800 but has since appreciated to around 1.2815 as traders await the outcome of Thursday’s ECB Rate Decision to see if Draghi can backup his statement of intent with actions.
Markets will be looking for a new bond purchasing programme, a further set of Eurozone interest rate cuts, a new set of cheap banking sector loans and the opportunity for the European Central Bank to become the Lender of Last Resort to struggling sovereign economies. It will be hard to get these sort of radical ECB transformations past the German government, and for this reason the optimism that many have taken from Draghi’s comments have been viewed by others as naive.
There has also been talk of coordinated action from the Bank of England, the Federal Reserve and the European Central Bank in an attempt to raise global growth prospects. If something of this sort comes into effect, involving some of the aforementioned non-monetary ECB stimulus measures, then the Euro could potentially mount a recovery rally. But if, as is so often the case, the speculation is not followed by decisive action then the Euro could face an intense decline as confidence in the single currency is stretched to breaking point.
Summary of major upcoming data releases that we think may move the market.
|Date||Time||Issuing country/region||Data Item||Market Expectation||Market Sensitivity|
|July 31st||07:55||EUR||EUR German Unemployment Change (JUL)||7K|
|Aug 1st||07:55||EUR||EUR German Purchasing Manager Index Manufacturing (JUL F)||43.3|
|Aug 1st||08:30||UK||GBP Purchasing Manager Index Manufacturing (JUL)||48.5|
|Aug 2nd||08:30||UK||GBP Purchasing Manager Index Construction (JUL)||48.7|
|Aug 2nd||09:00||EUR||EUR Euro-Zone Producer Price Index (YoY) (JUN)||1.9%|
|Aug 2nd||11:00||UK||GBP BOE Asset Purchase Target (AUG)||375B|
|Aug 2nd||11:00||UK||GBP Bank of England Rate Decision (AUG 2)||0.50%|
|Aug 2nd||11:45||EUR||EUR European Central Bank Rate Decision (AUG 2)||0.75%|
|Aug 3rd||08:00||EUR||EUR Euro-Zone Purchasing Manager Index Services (JUL F)||47.6|
|Aug 3rd||08:30||UK||GBP Purchasing Manager Index Services (JUL)||51.9|
|Aug 3rd||09:00||EUR||EUR Euro-Zone Retail Sales (YoY) (JUN)||-1.8%|
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