The Pound Euro (GBP EUR) exchange rate slumped yesterday as Tuesday’s failed asset purchasing programme from the Bank of England weighed on the markets. Sterling remains within touching distance of the over two-year lows struck in the immediate aftermath of the UK’s vote to Brexit from the European Union on June 23rd.
- UK RICS House Price Balance Slumps – Reading -1% lower than expected
- BoE struggles with QE plans – Previous day’s asset purchasing fell short
- Euro buoyed by EU Council ruling – No fines for Portugal or Spain
- Pound Euro exchange rate – Housing price data forecast to weigh on GBP EUR
GBP EUR exchange rates hit their lowest point since the Brexit referendum results were announced yesterday, with the Pound experiencing broad-based weakness in response to concerns regarding the efficiency of the Bank of England’s (BoE) stimulus measures and disappointing UK data.
German Economy Outperformed Expectations in Q2; Pound Euro Declines
Better-than-expected German GDP figures have boosted the Euro today. On the quarter, GDP growth clocked in at 0.4%, better than the drop from 0.7% to 0.2% forecast. Working Day Adjusted GDP only slowed -0.1% on the year, printing at 1.8% instead of 1.4% after the previous figure was revised up to 1.9%. On a non-seasonally adjusted basis, GDP climbed from 1.5% to 3.1%, 0.3% higher than forecasts thanks to the commensurate upwards adjustment to the previous figure.
Pound Euro around Opening Levels after House Price Balance Weakens
The drop in the latest UK RICS House Price Balance was even more severe than forecast, softening the Pound thanks to increasing fears over the UK’s housing market. July’s figure was -10% lower as had been predicted by the forecasts, but with a -1% downgrade to June’s result, the latest index clocked in at 5% instead of the expected 6%. Moody’s, the credit ratings agency, has also cast further gloom on the housing market after warning of headwinds facing UK mortgages.
Bank of England QE Complications Keep Appetite for the Pound Weak
On Tuesday, the Bank of England (BoE) began its second reverse bond auction, in which investors offered to sell bonds to the central bank. The aim was to drive up the price of government bonds, pushing yields to a low that investors would not find attractive, thereby causing them to look elsewhere for investment opportunities. Corporate bonds would have been one such alternative, with UK businesses benefitting from the increased interest among investors looking to lend them money. However, the asset purchasing programme hit an unexpected snag when the BoE received a total number of offers that was -£52 million less than its target £1.18 billion.
In a response to the shortfall released yesterday, the Bank of England simply stated that;
‘The Bank will incorporate the £52m shortfall from yesterday’s uncovered operation within the second half of the current six-month purchase programme. As set out in the Market Notice of 4 August 2016, details of these purchases will be announced on 3 November 2016.’
Not everyone was entirely happy with the Bank of England’s response to the problem. Royal London Asset Management’s Head of Derivatives, Darren Bustin, commented;
‘The Bank of England fell £50m short in its gilt purchase target for yesterday, and even then only secured this much by paying well above market price for some of these gilts. Today’s announcement has the Bank kicking the can down the road and has created a ‘wait and see’ scenario for investors looking at reasons for the failure. As quantitative easing was meant to have been a solution for the problems facing the British economy following Brexit, if this trend continues and monetary policy is unable to achieve its goals then the baton may have to be passed to the Treasury to find a solution.’
Another reverse auction was held yesterday, with the Bank of England able to find adequate sellers for seven-ten year bonds. The auction’s offer-to-cover ratio was 4.71, meaning investors offered to sell nearly five times the amount of bonds that Threadneedle Street was looking to buy.
Euro Boosted as EU Outlines More Accommodative Budget Deficit Targets for Spain and Portugal
With anti-EU sentiment already a problem within the Eurozone, markets had worried that potential fines against Spain and Portugal could create further political discord. The Iberian nations had been under scrutiny by EU lawmakers due to their breach of budget deficit targets. EU nations are supposed to keep their shortfalls below 3% of GDP; a target both countries significantly overshot. Portugal only left an international bailout programme in 2014, while Spain has been without a government since last December.
The EU could have levied fines against the nations for the breach, but relieved investors when it ruled that this would not be conducive to fixing the problem. In a statement, the EU Council explained;
‘Under EU rules, member states are not supposed to run annual deficits greater than 3% of their total economic output. Last year, Spain’s deficit was 5.1% of its gross domestic product (GDP) and Portugal’s stood at 4.4%. But citing “exceptional circumstances”, the EU Council has given each country more time to conform to the rules and bring their deficits down.’
Pound Euro (GBP EUR) Exchange Rate Forecast; Light Data Day Leaves UK Housing in Focus
There is little on the economic calendar today from either the UK or the Eurozone. The UK RICS House Price Balance for July is the only medium-impact data on offer. This is expected to decline from 16% to 6%, which is likely to keep the Pound on the downtrend thanks to fears over the housing market’s reaction to the Brexit vote. Negative correlation with the US Dollar could help keep the Euro strong; the latest US data has kept the ‘Greenback’ bearish.
GBP, EUR Conversion Rates
The Pound Euro (GBP EUR) exchange rate was trending in the region of 1.1636, while the Euro Pound (EUR GBP) exchange rate was trending in the region of 0.8594, towards the close of yesterday’s European session.