The Pound Sterling to Euro (GBP/EUR) exchange rate fluctuated for much of the past week as analyst and investor concerns towards both the UK and Eurozone economies left their currencies weak and uninspired.
Poor UK Data Prevents Sterling (GBP) from Gaining on ECB Concerns
Following a recent Euro rally against the Pound, GBP/EUR losses were slightly less severe this week due to investor anxiety towards the Eurozone’s economic situation.
Unfortunately, despite Euro weakness the volatile Pound has been unable to benefit as domestic fears and data weighed it down.
The GBP/EUR pair has been fluctuating within a fairly narrow range since Wednesday and was trending in the region of 1.2375 before the weekend.
The biggest hindrances to Sterling progress this week have included ‘Brexit’ bets, due to polls indicating a narrowed gap between ‘Remain’ and ‘Leave’ camps and a £9m Pro-EU leaflet created by HMRC to be distributed next week. As the leaflet was viewed as being paid for with taxpayer money, the move caused varying levels of public outcry.
From the data side of things, labour productivity was revealed on Thursday to have dropped -1.2% in Q4 2015, the fastest drop since 2008.
Friday’s data proved to be even worse, as new trade balance figures proved that deficits had narrowed by less than analysts predicted. The key trade deficit thinned from -£5.23b to -£4.84b, well below estimates of -£3.40b. The UK’s goods trade deficit with the EU worsened to a record high of -£8.6b.
Euro (EUR) Weakens as ECB Reaffirms Intention to Stimulate Eurozone
Investors’ views of the shared currency became cautious as Thursday’s release of the latest European Central Bank (ECB) minutes approached.
Perhaps the biggest standout detail from the March meeting minutes was the debate on which easing policies should be put into action, with some policymakers split on the effectiveness of certain methods.
While the consensus to introduce easing to stimulate inflation was wide, some officials suggested a tiered deposit rate system which would reduce the effects of negative interest rates. Others in the debate argued that there was little evidence to suggest negative interest rates caused considerable side-effects.
This suggested to analysts that negative interest rates were on the table for future monetary policy decisions, and that the ECB’s potential easing measures were still far from being dried up despite radical easing being introduced in March.
More optimistically, German data has remained positive in spite of otherwise negative Eurozone news. Friday morning’s German trade balance figure printed at an impressive 20.3b, well above January’s 13.4b and over 2b above the 18.0b estimate.
This data may have helped keep the Euro afloat and prevent Sterling from gaining much of an advantage.
Heavy UK Data Week Ahead, GBP/EUR Exchange Rate Volatility Forecast
The Euro may get chance to breathe and send GBP/EUR down towards a two-year-low next week, unless ECB comments inspire long-term wariness in investors.
Confidence in Britain’s economy is not high after the onslaught of disappointing data released this week, and as such investors may adjust their positions on the Pound to reflect this ahead of next week’s British datasets.
Tuesday sees the release of Britain’s key March CPI which may print poorly if it follows the recent trend in UK data. The severity of the score is likely to affect how weak Sterling could be going forward through the week, although an uptick in inflation could give the Pound a boost.
Thursday afternoon sees the announcement of the Bank of England’s (BoE) latest interest rate and asset purchase target decisions.
While the key interest rate is currently forecast to remain at its record low of 0.50%, mounting concerns about a post-EU referendum Britain may influence the bank to discuss post-‘Brexit’ possibilities.
Eurozone CPI is also due next week and investors are likely to eyeball the Eurozone and German prints closely to see if inflation shows indication of recovery. Positive results here would have the knock-on effect of improving the ECB outlook and inspiring more confidence in Euro investors.
