Pound in big rally against Euro

The Pound rallied by over three cents against the Euro last week as European Central Bank President Mario Draghi talked up the possibility of further monetary stimulus. Foreign currency exchange specialist Luke Trevail looks at the factors driving exchange rates, and what the future might hold.

Sterling got off to a good start against the single currency last Monday, rallying from below 1.3600 to 1.3660 as UK house prices surged 4.9% and easing fears weighed on the Euro.

The Pound ticked slightly higher again on Wednesday as markets reacted positively to an improvement in UK public finances. September’s budget report showed that the government needed to borrow £8.6 billion last month to balance the books, down from £10.8 billion in August.

The Pound to Euro exchange rate leapt to 1.3870 on Thursday in reaction to a bumper UK retail sales score of 1.9% and a markedly doveish statement from ECB President Mario Draghi, who left policy on hold in October, but spoke extensively about the possibility of bolstering the bank’s €60 billion a month asset purchasing scheme in the future. Markets now expect the ECB to provide additional stimulus to the Eurozone economy – either in the form of a rate cut, a cut to the deposit rate, a widening of the asset purchasing remit or by prolonging the QE scheme past next September’s proposed end date – in December of this year.

GBP/EUR trudged along on Friday, reaching a fresh two-month high of 1.3947, as ECB stimulus bets continued to hamper demand for the single currency.

This week’s economic calendar has a few important ecostats to look out for. Headlining the docket is Tuesday’s third quarter UK GDP report, which is tipped to show a deceleration from 0.7% to 0.6%. The growth figures are unlikely to help the Pound unless they come in above 0.7% but Sterling should avoid any steep losses as long as GDP remains at 0.5% or above.

The other key reports to keep track of are Thursday’s German unemployment rate, which is expected to remain at 6.4%, and Friday’s Euro zone CPI score, which markets hope will show a small improvement from -0.1% to 0.0%. However, barring a disastrous Q3 UK GDP score, the prospect of enhanced QE and further rate cuts from the ECB is likely to depress demand for the Euro and we could see GBP/EUR rally towards 1.4000.