The Pound Sterling to Euro exchange rate (GBP/EUR) closed for the weekend at 1.1826 last Friday and rose minimally when markets reopened in Asia for the new week of trading.
Barring a handful of troughs, and one short-lived peak, the Sterling / Euro rate remained bookended between 1.1800-1.1900 during last week’s session as the Bank of England elected to leave interest rates on hold at 0.50% and decided against increasing the asset purchasing target from its current level of £375 billion. The Pound also benefitted from a surprise 0.7% increase in Industrial Production and an unexpected 1.1% jump in Manufacturing Output.
The single currency took heart from an encouraging 2.2% rise in German Factory Orders and an upward revision in the Eurozone Composite Purchasing Managers Index from 46.6 to 46.9.
However, the relative calm between the Pound and the Euro could be unsettled this week as the latest Eurozone GDP data is released. French GDP is projected to have fallen by -0.1% during the first quarter, Italian growth is predicted to print at -0.4% and the currency bloc’s flagship economy is expected to post a quarterly gain of 0.3%. Despite the rebounding German figure, the 17-nation bloc is expected to decline by -0.1% overall, which would mark the sixth consecutive quarter of contraction.
So far this year extensive quantitative easing schemes from the world’s major Central Bank’s have given risky assets – especially Italian, Portuguese, Irish and Spanish government bonds – a large boost. Assets that in their own right would be considered too dangerous, have attracted traders due to the belief that the Federal Reserve, the BoE and the BoJ will continue to pump vast amounts of electronic money into the financial system to keep liquidity flowing. The Euro has particularly benefitted from European Central Bank Chief Mario Draghi’s pledge to offer unlimited support to struggling sovereigns on the bond market.
With traditional investments failing to bring in the profits that they have in the past, investors have begun looking to peripheral Eurozone debt as a way of making a quick Buck. However, this illusion of security could very easily be shattered if Central Bank stimulus is withdrawn. Indeed, the Federal Reserve is reportedly already in the midst of slowing down the pace of its expansive $85 billion a month quantitative easing scheme.
With Unemployment running riot – and causing riots – in the currency bloc, inflation predicted to remain at a suppressed 1.2% in Germany, and Eurozone-wide economic growth remaining stunted: it is growing increasingly likely that the ECB may opt to introduce an asset purchasing scheme of its own. A programme of this nature could help direct capital to small and medium-sized businesses, but it would also carry the consequence of driving the single currency lower against the Pound.
Conversely, as the ECB begin to consider embarking on a full scale QE programme, the BoE appear to be moving away from direct monetary stimulus as the British economy begins to show signs of improvement. A hawkish, or even a neutral, Central Bank Inflation Report later this week could bolster demand for the Pound against its European rival the Euro.
A mildly positive BoE Inflation report paired with a deeper-than-expected Eurozone first quarter contraction could allow GBP/EUR to reach a fresh 4-month high of 1.1910 later this week. In the long term the Euro will remain susceptible to enhanced ECB support, or reduced stimulus from the Federal Reserve.
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