After a slow start for the pound in the previous week, demand for sterling picked up in the second half of the week. The pound euro exchange rate gained 0.3% across the past week owing to a slightly more hawkish Bank of England and signs that the German economy is running out of steam. GBP/EUR rallied to a 6-week high of €1.1925, before closing the week slightly lower at €1.1899.
As the new week kicks off the pound is slipping as Brexit fears return to haunt investors. GBP/EUR is trading -0.15% at €1.1879 at the time of writing.
GBP/EUR – Pound sterling continued to show cautious optimism surrounding the exit on Friday
Last week was a big week for the pound with a BoE monetary policy announcement and Brexit. The BoE voted 7-2 in favour of keeping policy unchanged following early signs that the British economy had picked up following the U.K. election. This was a more hawkish split than what market participants had been expecting, boosting the pound.
After 47 years in the EU, the U.K. left the on Friday evening at 11pm local time. The pound continued to show cautious optimism surrounding the exit on Friday, even though what lays ahead remains unknown.
However, that optimism was short lived. Boris Johnson is due to set out his visions today for the post Brexit relationship. He is expected to say that any deal which requires the UK to be closely aligned with the EU on rules will be rejected. This will raise fears that no trade deal will be agreed, making a no deal Brexit more likely.
Euro
Despite more encouraging data at the start of last week, German retail sales on Friday indicated that a recovery in Europe’s largest economy was running out of steam by the end of last year. German retail sales declined by more than expected in December, down -3.3% month on month. November’s figures were also revised downward, hitting sentiment further.
Earlier in the week consumer confidence and business confidence figures had been upbeat. Thanks in part to the signing of the first phase trade deal between US and China.
As a result of the mixed data so far, investors will be watching very closely when pmi manufacturing data is released today. Should PMI readings fall short of expectations, eurozone recession fears could rise, dragging on the euro.