- Pound Euro Exchange Rate Drops to 1.17 – Gives up weekly gains after BoE announcement
- Bank of England (BoE) Cuts Rate to 0.25% – Introduces new QE measures too
- Eurozone Retail PMI Contracts – Euro unable to fully capitalise on weak Pound
- Update: German Factory Orders Disappoint – Weakens Euro slightly on Friday
- Forecast: Next Week’s Economic Calendar Quiet – Opportunity for Sterling to recover
Pound Euro Exchange Rate Fails Friday Recovery Attempts
Investors were quick out of the gate on Friday morning as Sterling attempted to edge up slightly from the lows it crashed to on Thursday afternoon.
However, while investors initially toyed with buying the Pound from its new cheap levels, all focus turned towards the US economy on Friday afternoon as the latest US Non-Farm Report revealed that the US economy had created an impressive 255k new jobs in July.
This report undermined both the Pound and the Euro, but ultimately meant that GBP/EUR’s attempts to recover considerably above 1.18 were futile. GBP/EUR trended just below that key level as the week drew to an end.
Next week’s economic calendar will be relatively uneventful compared to the roller-coaster of ecostats the Pound and Euro have endured over the last few weeks.
This means that the Pound could recover slightly from its worst levels. However, the currency is unlikely to advance far as the possibility of more BoE interest rate cuts in the coming months leaves Sterling pressured.
(Published 06:00 BST 05/08/2016)
The Pound Euro exchange rate headed back towards its weekly lows on Thursday afternoon as the Bank of England (BoE) introduced a more aggressive than expected monetary stimulus package. Not only did the MPC unanimously decide to cut interest rates, but new bond purchasing and quantitative easing schemes were put into place.
GBP/EUR hit a new three-week-low of 1.1762 briefly on Thursday afternoon as investors sold off the Pound in droves, falling from a one-week-high of 1.1980. By the end of the day the pair hadn’t recovered considerably and trended in the region of 1.1790.
Sterling (GBP) Undermined as BoE Unleashes Slew of Policies
Recently famous for leaving policy alone with a record low interest rate of 0.50% for years, the Bank of England (BoE) surprised markets once again the 4th of August, ‘Super Thursday’, as it introduced a bigger-than-expected package of monetary easing policies.
Following the announcement, the Pound quickly shed its weekly gains and plunged further than some analysts expected, instantly losing around two cents of value against the Euro.
The stimulus measures introduced on Thursday include, of course, the interest rate cut of 0.50% to 0.25% – decided unanimously by all 9 members of the Monetary Policy Committee (MPC).
Other measures included up to £10bn being pumped into corporate bond purchases, and a new quantitative easing asset purchase programme of £435bn. Bloomberg reported;
‘The easing arrives amid mounting signs that quitting the EU is having an adverse impact on the U.K. economy. While the full fallout hasn’t yet shown up in official data, initial reports show confidence has slumped and industry surveys have weakened.
The central bank cut its growth forecast for next year to 0.8 percent from 2.3 percent and lowered its 2018 prediction to 1.8 percent from 2.3 percent.’
Some investors were likely prepared to take Sterling higher again if any BoE policymakers were hawkish on the future of the economy.
However, Governor Mark Carney’s press conference was dovish in tone and indicated that further rate cuts were possible, amid grim forecasts of higher unemployment and stunted growth.
Euro (EUR) Dragged Down on Mixed Data and Pound Association
As the Eurozone’s premium currency, the Euro has a close relationship to other major currencies in the European Union such as, of course, the Pound. This relationship means that the Euro is often dragged down in Pound cross-flows, as was the case on Thursday afternoon.
Other factors also weighed on the Euro’s appeal on Thursday, making it difficult for the shared currency to fully capitalise on a weak Pound. This included mixed retail PMIs from Markit.
While these retail scores all showed improvements from June’s retail scores, it revealed that some Eurozone countries such as Italy were still struggling thoroughly in the retail sector. Italy’s Retail PMI improved from 40.2 to 40.3 month-on-month, still a considerable contraction.
Italy’s low scores helped to drag the Eurozone’s overall Retail PMI down to 48.9 in July, though it was still an improvement from June’s contraction of 48.5.
Eurozone bond yields also slumped throughout the day, according to Reuters;
‘Eurozone bond yields fell sharply on Thursday, hauled down by a dive in British yields to record lows after the Bank of England cut interest rates and restarted its bond purchase programme to ease the economic blow from Brexit.
German 10-year yields, the euro zone benchmark, which were already lower on the day after hints the European Central Bank would also soon adjust its stimulus programme, fell to minus 0.14 percent, according to Tradeweb data.’
Pound Euro Exchange Rate Forecast: Will Sterling Rise from Worst Levels on Friday?
With Friday’s economic calendar unlikely to be influential compared to the other publications and data this week, Friday’s session may be an ample opportunity for investors to adjust their positions on the week’s news.
June’s German factory orders report will be published in the morning, followed by a UK house prices report from Halifax.
German factory orders are expected to have improved from stagnancy to 0.5% month-on-month. If the report comes in above expectations, it may boost the Euro slightly on Friday – especially if the yearly figure scores better than bearish forecasts of -1.5%.
Otherwise, the Pound and Euro will continue to adjust as investors continue to react to Thursday’s Bank of England news.
It is possible that Sterling will recover from its worst levels to trend a bit closer to the week’s opening levels on Friday. However, an extended rally is unlikely due to bets that the BoE could introduce even more easing measures in both the mid and long-term.
This is likely to add long-term pressure to the Pound, especially with unemployment now forecast to worsen over the next two years.
As a result, bearish analysts have suggested that the Pound Euro exchange rate could be considerably lower than its current levels by the end of 2016.