The Pound to Euro exchange rate spent the month of June in a relatively tight range as markets watched the Conservative Party leadership race play out, writes Ben Scott of Global Reach.

During the month of June, GBP/EUR traded between interbank levels of €1.11 and €1.13, hitting it's highest levels at the start of the month, and it’s lowest at the end.

Politics Drive GBP/EUR Exchange Rate

The start of June saw British Prime Minister Theresa May step down, allowing the Conservative Party leadership race to officially get underway.

The potential of a no-deal Brexit appears to be very much on the table, with the prospect of more volatility in store for the Pound as markets approach the October 31st Brexit deadline.

If the UK did crash out of the EU without a deal in place the economic impact could be significant, with some industry experts suggesting a recession would follow.

Calling the Bluff of the ECB

The European Central Bank (ECB) has been known to jawbone the Euro lower. Dovish comments from policymakers and the central bank Chief Mario Draghi have weighed on the currency over the years, but with a lot of talk since the financial crisis, and little action, markets are less willing to believe bankers these days. Dovishness at the start of the month from the ECB President was met with a muted reaction from the common currency—a frustrating development for policymakers who had hoped that a weaker currency could help to boost exports and growth.

The European Central Bank (ECB) will soon appoint a new Chief to take over from Draghi when he steps down on October 31st, and Christine Lagarde—current head of the International Monetary Fund (IMF)—is the nomination. She’s seen as likely to continue with ultra-accommodating monetary policy, which may keep the Euro in check long-term.

Economic data shows decline

In the Eurozone, inflation cooled sharply at the start of June ahead of the European Central Bank’s policy meeting, falling from 1.7% in April, to 1.2% in May on the year. This reading is far below the ECB’s inflation target of 2.0%. By 11th June there was a bright spark in UK data, with wages showing a faster-than-expected growth between the three months of February to April. On the year, pay increased by 3.4%, while levels of unemployment remained at 3.8%.

On June 19th, data revealed UK inflation edged lower from 2.1% in April to 2.0% in May, a reassuring move for BoE policymakers who may have been under more pressure to raise rates quicker should inflation have kept increasing.

On the 20th June, Eurozone consumer confidence data showed a further decline in sentiment, coming in at -7.2, down from the previous month’s -6.5 and forecasts to remain there. Business confidence data also took a tumble at the end of month, at 0.17 rather than the 0.23 forecast and a decline from the previous 0.30. The end of the month showed UK growth came in at 1.8% in the first quarter; however, given recent economic declines there are questions as to whether the UK may have registered negative growth in Q2.

Forecast

The start of July put further pressure on the Pound when manufacturing activity noted its sharpest contraction in more than six years. The Markit Manufacturing Purchasing Managers’ Index (PMI) came in at 49.4 in May; any reading below the 50.0 benchmark denotes contraction. Economic data also showed UK construction activity dropped to a decade low as Brexit impacted confidence and saw building projects put on hold.

Meanwhile, consumers slowed down their borrowing, at the slowest rate since 2014.

The economic data has pressured the Pound lower against other currency majors, as questions remain as to how much of an impact Brexit is having on the British economy. UK growth data out on 10th July and 9th August will be closely watched to see how UK expansion is faring. The Bank of England recently cut its growth outlook, to suggest the second quarter flat-lined with 0.0% expansion.

Meanwhile, the Euro could soften in coming months if the ECB’s new Chief wants to implement heavy stimulus measures. There are questions as to Lagarde’s experience as a central banker, meaning she may utilise advice from her close aides. This potentially could see more dovishness and impact the bank’s stimulus quantities.

Ben Scott
Global Reach