- Strong UK employment data boosted Pound – Wage growth and unemployment rate bettered expectations
- Euro struggled to capitalise on improved French inflation – Single currency muted by reduced safe-haven demand
- Bank of England meeting minutes in focus – Policymaker discussion expected to provoke GBP/EUR exchange rate volatility
- ‘Brexit’ worries to maintain downside pressure on Pound – Referendum uncertainty to escalate with just one week left ahead of vote
Bank of England Rate Decision Sends Pound Higher Vs Euro
With the Bank of England (BoE) once again stressing the potential negative impact of a ‘Brexit’ on the UK economy, the Pound to Euro currency pair was able to firm as the European session continued. Policymakers suggested that the ramifications of a ‘Brexit’ would be far reaching which was seen as supportive to the ‘Remain’ campaign.
The GBP EUR exchange rate rallied beyond 1.26. Although gains were initially limited with EU Referendum concerns dominating market sentiment, the Pound consolidated its advance on the Euro after EU referendum campaigning was suspended in response to the tragic attack on MP Jo Cox. The Labour MP was shot and stabbed during an attack in West Yorkshire and was later reported to have died from her injuries.
The event was a major shock and despite much speculation about Ms Cox’s attacker, details have yet to be confirmed.
EU referendum campaigning is not expected to resume until tomorrow at the earliest but some analysts believe the event may have increased support for the ‘Remain’ campaign.
On Thursday the Pound Euro exchange rate advanced to 1.2715 before trimming some of these gains as trading continued.
With less than a week left before the referendum vote, campaigning is expected to resume tomorrow.
In terms of economic news, UK reports were lacking today but the Eurozone’s current account surplus expanded in April, climbing from a negatively revised 26.3 billion to 36.2 billion.
Next week economic data is likely to take a complete back seat to ‘Brexit’ uncertainty as the vote creeps ever nearer.
(Previously updated 13:05 16/06/2016)
UK Retail Sales Impress, But GBP/EUR Remains Pressured
The Pound Euro exchange rate was trending in the region of 1.2580 ahead of the Bank of England’s (BoE) interest rate decision.
GBP’s struggles against the Euro continued despite the UK publishing impressive retail sales figures. Retail sales were shown to have increased by 1.0% in May, month-on-month and 5.7% year-on-year.
According to Reuters: ‘Looking at sales in the three months to May – which smooths out some volatility in the data – volumes were up 1.5 percent on the previous three months, the biggest rise since November 2015. Consumer spending has been a major driver of Britain’s economic expansion over the past three years, but household confidence has slipped to its weakest since late 2014 in the run-up to a June 23 referendum on European Union membership.’
(Previously updated 08:30 16/06/2016)
Although the prospect of a ‘Brexit’ continues to overshadow the outlook of the Pound Euro (GBP/EUR) exchange rate, it nevertheless benefitted from a general decline in safe-haven demand.
The Pound was also able to gain on Wednesday as the UK published better-than-forecast unemployment and wage data. The UK’s unemployment rate fell to its lowest levels since 2005 while wage growth failed to decline as expected.
Pound (GBP) Rallied in Response to Steady UK Wage Growth
Following sharp losses since the start of the week the Pound (GBP) returned to stronger form on Wednesday, buoyed by unexpectedly positive UK data. Investors were encouraged to find that the ILO Unemployment Rate had fallen from 5.1% to 5.0% in the three months to April, which would appear to suggest a greater tightening within the domestic labour market. Optimism was also bolstered by a stronger-than-expected Average Weekly Earnings figure, as wage growth held steady at 2.0% rather than slowing to 1.7% as had been anticipated.
This stronger showing indicated that referendum uncertainty had not exerted an overly negative impact on conditions within the domestic economy. As a result markets were inclined to view the outlook of the UK economy more positively, with evidence of a greater underlying slowdown also having failed to materialise. Altogether this suggested that growth could be more robust within the second quarter, regardless of the outcome of next week’s referendum.
Bullish Eurozone Data Failed to Encourage Euro (EUR) Demand
Demand was largely lacking for the Euro (EUR), meanwhile, in spite of a positive Eurozone trade balance report. In April the Eurozone’s trade surplus was found to have widened from 23.7 billion to 28.0 billion Euros, a result which would suggest that the currency union was in a relatively robust state.
Further signs of strength came from the French inflation rate, which was unexpected revised higher from -0.1% to 0.0% in May. Although this recovery in inflationary pressure could encourage the European Central Bank (ECB) not to consider any further policy easing in the near future the appeal of the single currency remained diminished. Largely this reticence towards the Euro was due to a general decrease in safe-haven demand ahead of the latest Federal Open Market Committee (FOMC) policy meeting, as markets anticipated no change in interest rates at this juncture.
GBP/EUR Exchange Rate Forecast: BoE Minutes Could Ease ‘Brexit’ Concerns
Today’s Bank of England (BoE) policy meeting is not considered live, with the hands of the Monetary Policy Committee (MPC) effectively tied ahead of the EU referendum. Even so the meeting minutes could provoke further volatility for the Pound, with investors keen to see if policymakers are discussing contingency plans for the event of a ‘Brexit’. Any reassurance to that end, or reiteration of the risks of a vote to leave the EU, could see the GBP/EUR exchange rate rally strongly.
Nevertheless, as Jane Foley, Senior FX Strategist at Rabobank, noted:
‘Assuming a ‘Remain’ vote on June 23 we see May 2017 as the earliest date for the first BoE rate hike of the cycle. On balance we expect that uncertainties connected with the growth outlook suggest that a ‘Leave’ vote could result in lower rates for longer despite the likelihood of a weak pound promoting cost push inflation.’
The Euro, on the other hand, could be shored up by the finalised Eurozone Consumer Price Index for May. Although investors do not anticipate any change in the figure a reminder that the ECB’s extensive loosening measures are having a positive impact would improve the appeal of the single currency.