The GBPEUR exchange rate has surrendered almost 300 pips from Monday’s high as hedge funds unwind their long positions on sterling. Futures data had shown leveraged pound bets at their highest in over a year, but Boris Johnson’s stubbornness over the economy’s reopening sparked the selling.
The GBP to EUR rate is trading at 1.1505 in early trading on Friday and we may have seen the highs for the pound for the second quarter.
ECB Minutes Clarify Bank’s Outlook
The European Central Bank (ECB) minutes were released yesterday, and it helped to clarify some confusion in traders after their last meeting. The bank highlighted that risks had now become “more balanced” in the Eurozone and this is largely down to the bank’s fight last year with deflation. In the latest minutes, the ECB made many references to the US stimulus package and said that it would be a driver for European growth.
The bank still sees the recent higher inflation as a temporary phenomenon, but a quarterly assessment would be made on further changes to the Pandemic emergency purchase programme (PEPP) bond buying scheme. The recent lockdowns in Germany and France have reduced any near-term pressure on prices for now.
The ECB also clarified its reaction plans by saying that as long as bond yields rise to represent growth, they will be happy. Otherwise, they will intervene to cap rates.
“If we want a strong economy, we need to invest, and invest right now. The key point is to have a quick EU recovery and have the plan implemented as soon as possible.” The minutes also said:
“The debate or even fear of surging bond yields was a bit of a storm in a teacup.”
The latest inflation figures have removed the pressure on the bank over yields, but it may be growth that becomes the issue if the EU can’t tackle the latest virus wave. Today saw the release of trade balance figures for Germany and France with an improvement for both as Brexit issues clear up.
However, France still said the 4% increase in goods to Britain was still only 84% of the monthly average during the latter part of 2020.
UK Construction PMI boosts Sterling Hopes
The UK saw a sharp increase in construction activity with the fastest increase since 2014 as the sector rebounded.
The latest update for the construction sector, which makes up 6% of UK Gross Domestic Product (GDP), saw strong growth in housing, commercial and infrastructure projects. The IHS Markit/CCips construction activity index scored 61.7 for which was a big leap from the 53.3 seen in February. Construction projects have been allowed to continue while the country was locked down, although some friction would have been seen in the supply chain. The stronger data failed to boost the pound and the recent unwind continues.
GBPEUR will now look for support at the 1.1500 level this morning and the pair may consolidate until further data emerges on the economic outlook.
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