- Pound Euro a Cent up from Week’s Lows – Pair trends near 1.14 on Thursday
- Bank of England (BoE) Feels Pressure – Policymakers split on policy this month
- GBP Forecast: Political Developments Remain in Focus – Brexit concerns persist
- EUR Forecast: Final May Eurozone Inflation Due – Bloc data expected Friday
Pound Euro Surges after Bank of England (BoE) News
The Pound Euro exchange rate sustained most of its daily gains towards the end of Thursday’s European session as investors became more optimistic that the Bank of England (BoE) would tighten UK monetary policy within the foreseeable future. GBP EUR trended in the region of 1.14.
Despite market optimism, the Pound’s gains have been relatively limited and GBP EUR remains below last week’s highs. Political concerns of a weaker UK government and concerns about Britain’s economy potentially slowing later in the year have kept pressure on Sterling.
Thursday’s Eurozone data disappointed which helped the Pound Euro exchange rate to recover from this week’s lows.
France’s final May Consumer Price Index (CPI) results came in at a stagnant 0% month-on-month despite being projected to come in at 0.1%.
The Eurozone’s April trade balnace update also disappointed, dropping to €17.9b rather than the forecast €27.2b.
[Previously updated 12:38 BST 14/06/2017]
Despite continued underwhelming UK ecostats this week, the Pound Euro exchange rate jumped up by over half a cent during Thursday’s European session as investors reacted to the latest Bank of England (BoE) news. GBP EUR trended above the level of 1.14 for the first time this week.
This week’s BoE meeting saw two more Monetary Policy Committee (MPC) members join Kristin Forbes and vote for a UK interest rate hike. This left a split among members, with 5-3 voting to leave rates frozen. This was the most policymakers to vote for a UK interest rate hike since 2011.
Britain’s inflation hit 2.9% in May as was published earlier this week. This figure appears to have pressured more policymakers into voting for a hike despite concerns about Britain’s economy slowing.
However, the Pound’s gains may be limited as economic and political uncertainties remain high. This was also Kristin Forbes final session on the MPC and her successor may not be quite as hawkish.
[Previously updated 16:42 BST 14/06/2017]
Pound Euro Exchange Rate Remains Weak Despite Tuesday Recovery
While the Pound Euro exchange rate recovered from its worst 2017 levels on Tuesday, Wednesday saw continued weakness in the pair as investors reacted to the week’s UK wage growth data.
Towards the end of Wednesday’s European session, GBP EUR trended in the region of 1.1340 – well below the level of 1.1400 seen first thing in the morning.
Investors are now looking ahead to Thursday’s session, when the Bank of England (BoE) will hold its June monetary policy decision.
GBP EUR will see an increase in demand if the bank surprises by indicating that it may have to tighten monetary policy soon in order to tackle inflation.
On the other hand, recent political and economic uncertainty is more likely to leave the bank dovish, meaning GBP EUR weakness could last until the end of the week.
[Previously updated 12:51 BST 14/06/2017]
After briefly recovering to the level of 1.14 on Wednesday morning, the Pound Euro exchange rate dropped to 1.13 again as markets reacted to Wednesday’s UK employment data.
April’s employment rates were solid, but the main takeaway of the report was that wage growth had been even slower than expected.
Wage growth excluding bonuses was forecast to come in at 2% in April. Even this would have been well below the current rate of consumer price growth, but the figure unexpectedly dropped to an even worse-than-expected 1.7.
Analysts are ramping up their concerns about Britain’s economic outlook amid this ‘pay squeeze’. As pay isn’t keeping up with the growth in consumer prices, Britain’s consumer-facing economy is likely to slow later in the year as citizens hesitate to spend.
[Published 06:00 BST 14/06/2017]
After sliding on Friday and Monday, Tuesday saw the Pound Euro exchange rate emerge from its worst levels this year as UK inflation came in higher than expected. Political uncertainty persisted however, preventing GBP EUR from making any major gains.
GBP EUR began the week at the level of 1.1382. On Monday evening the pair hit 1.1282, its worst level since November 2016. The pair trended just above the level of 1.1350 for most of Tuesday.
Pound (GBP) Emerges from Lows on Inflation Hopes
Despite warnings from analysts and the Bank of England (BoE) itself, investors are still speculating that the Bank of England could be pressured into tightening monetary policy if UK inflation gets too strong.
Tuesday saw the publication of Britain’s May Consumer Price Index (CPI) results, which were higher than expected in all major prints.
Year-on-year inflation was forecast to remain at 2.7% but instead rose to 2.9%. Monthly inflation only slipped from 0.5% to 0.3% despite being projected to drop to 0.2%.
As inflation drew ever closer to 3%, BoE interest rate hike speculation flared up once again as investors expect the BoE to eventually tackle rising inflation.
Higher interest rates would lead to an increase in Pound demand, which would offset some inflation. Recent UK inflation has been largely caused by the Pound’s drop in value since last year’s Brexit vote which is why the BoE has thus far ruled out tightening monetary policy.
Analysts still expect the BoE will resist calls to tighten monetary policy however.
The Pound outlook is still poor this week as uncertainty rises about Britain’s political situation. Analysts have also warned on Britain’s economic outlook as inflation rises and wage growth slows, affecting consumer activity. According to Stephen Clarke from the Resolution Foundation;
‘The latest rise in inflation adds further pressure to already shrinking pay packets. The uncertain political environment, coupled with Brexit negotiations beginning in six days’ time, is already having an impact on Sterling and could create further inflationary pressures down the track.’
Euro (EUR) Slips Following Mixed ZEW Data
After a solid performance on Monday, the Euro was sold from its multi-month highs against the Pound due to UK inflation data as well as this week’s mixed Eurozone ecostats.
Tuesday saw the publication of economic sentiment surveys for June from ZEW. ZEW’s German current conditions print beat expectations of 85, rising from 83.9 to 88, while the Eurozone economic sentiment index improved from 35.1 to 37.7.
However, Germany’s economic sentiment index from ZEW failed to meet expectations. Sentiment was projected to improve slightly from 20.6 to 21.5, but instead dropped to 18.6.
The report was optimistic overall, but this was not enough to keep the Euro sturdy ahead of this week’s key Eurozone inflation data, which is expected to disappoint.
The shared currency benefitted on Monday from French legislative election news. French President Emmanuel Macron’s ‘en Marche!’ party is expected to win a majority of seats in the election despite the party only existing for around a year.
German Chancellor Angela Merkel indicated on Monday that Macron’s success could pave the way for strong EU integration. The second round of legislative elections will take place on Sunday the 18th.
Pound Euro Forecast: UK Employment Data Due Wednesday
Key UK data will be published on Wednesday. This would typically be highly influential for the Pound Euro exchange rate, but amid UK political uncertainties its effect on financial markets could be subdued.
Jobless claims data from May and UK job market stats from April will be published. Of particular interest will be the wage growth data, which is expected to slow from 2.1% to 2% excluding bonuses.
If wage growth slows as expected it will indicate that lower income households will struggle to keep up with rising inflation and consumer spending will drop. This would lead to slower Gross Domestic Product (GDP) growth due to Britain’s largely consumer-facing economy.
The Euro is likely to be influenced by German inflation stats, Eurozone industrial production and Eurozone employment data on Wednesday. If German inflation beats expectations, the Euro will see an increase in demand.
Thursday will be an even more vital session as the Bank of England (BoE) will hold its June monetary policy decision.
If the BoE hints that policy could be loosened even further due to recent political and economic uncertainty the Pound Euro exchange rate is likely to end the week lower.