The Pound started and closed April at similar levels against the Euro, but there were some sharp movements in-between, writes Ben Scott of Global Reach.
The start of the month saw Sterling climbing against the Euro. Economic data showed the UK manufacturing sector had experienced expansion in March—mainly due to pre-Brexit stockpiling—while the EU’s manufacturing activity continued to slow.
Adding to the bad news in Europe was Eurozone inflation data, which showed a decline from 1.50% to 1.40% in March on the year—its lowest level in two years. German Factory Orders also posted its biggest loss in two years with a -8.4% tumble, adding to the Eurozone’s bleak outlook.
Meanwhile, the UK’s powerhouse services sector noted its third consecutive month of contraction in March on account of Brexit concerns—this is the first time there have been three declines in a row since the Global Financial Crisis.
Cross-party talks boost Sterling
As the month progressed, Sterling took an upswing against the Euro as optimism increased that cross-party talks might lead to some form of Brexit compromise.
After the somewhat inevitable extension of Article 50 at the end of March, the Pound had remained relatively unchanged. Concerns rose that this kind of extension could keep the door open for further political uncertainty, such as a general election.
In the currency bloc, the Euro was coming under pressure from downbeat comments made by European Central Bank (ECB) Chief Mario Draghi. The central banker’s comments were delivered in a press conference following the decision to keep interest rates on hold in its ultra-loose policy stance, and pressured the Euro lower against other majors. Draghi suggested risks to the economy remained, and that the bank was considering if further stimulus was needed.
Data in focus
A brief parliamentary recess put UK economic data back in focus in the absence of Brexit, and on the 17th April, the Pound sold-off against the Euro after UK inflation data disappointed. Inflation held steady at 1.9% in March, but economists had forecast a rise to 2.0%. A fall in the prices of video games and food caused inflation to stand still, but were welcomed by British consumers who have been struggling with real wage growth since 2007/8.
Deloitte Chief Economist Ian Stewart commented: ‘Inflation has been running below wage growth for over a year. This perfectly timed revival of consumer spending power has coincided with further falls in unemployment and means the UK consumer is pretty well positioned to cope with Brexit-related uncertainties.’
By mid-April, good news for the Eurozone came in the form of Chinese growth stats. China’s downturn at the end of 2018 has been weighing on Germany’s manufacturing sector, and so there’s hope the upswing in growth could help Germany too. While the latest surveys showed that economic sentiment was staying low, there was a surprise upswing in future growth expectations.
As the month came to a close, the Pound was under pressure again while a lack of Brexit developments took place. In the last few days of April, Sterling managed to recover somewhat.
The start of May has seen the Bank of England leave interest rates on hold, but upgrade its 2019 growth forecast from 1.2% to 1.5%. While recent inflation figures show consumer prices are roughly in line with the BoE’s target, it’s likely the Monetary Policy Committee (MPC) will proceed with caution amid Brexit. BoE Chief Mark Carney commented that there might be ‘more and more frequent interest rate increases than the market expects’ if recent economic forecasts come to fruition.
While Brexit continues to play out, the Pound is susceptible to sharp swings. A successful deal may lend the Pound some support in coming months, but more setbacks for Theresa May, further political uncertainty, or the prospect of another extension could weigh on both the economy and Sterling. Markets will be watching economic data closely—it’s likely the March figures, and perhaps some of the Q1 readings, have been impacted by the original Brexit day proximity.
The Euro could also be in for some political volatility in coming months with the EU elections on May 23rd, which may see a surge of populist party favour. Economic data in Europe is also being closely watched given the core economies have been experiencing softer data releases, while some of the periphery economies have been noting growth. Any talk of further stimulus from the ECB may serve to pressure the Euro lower.