The GBPEUR exchange rate rallied in the first three days of trading last week but the pair surrendered those gains as the Bank of England cut its QE program slightly at its Thursday interest rate meeting. Sterling sold off as traders have to adjust once more to a very cautious approach to the UK outlook. The bank upped their growth forecast to 7.2% for the UK and the pre-virus activity levels are now expected to be seen this year.
GBPEUR saw its gains falter with the pair trading under 1.1520 on Friday and the 1.1280 would be support for the pair in the week ahead if a larger bout of selling appeared.
Scottish elections could drive the mood for sterling
The Scottish election result could be key for the pound this week as votes began counting on Friday morning at 9am. The SNP are widely expected to see a fourth term, but the vote share and majority will be the important part. Recent polls have shown the SNP tipped for a four seat majority, but the underlying vote is expected to be around 52% of the constituency vote and 38% on the regional list.
Despite the slim percentages, the SNP could grasp any majority to talk about independence once more and the polls for such a vote were not very supportive of another referendum regardless of what the Scottish elections say. Voters are tired of friction and uncertainty, while many are tired of their vote being hijacked for a larger agenda.
Nicola Sturgeon had tried to cool talk of independence recently by saying that they shouldn’t “steamroll” a path to another vote but we will have to see how that plays out this week.
The other issue is that Boris Johnson has ruled out another vote and if Scotland were to attempt to pull off their referendum it would raise the old ghosts of the Catalonia battle with Spain. The EU would then have an issue over whether they support destabilizing the UK and welcoming Scotland back, which would enrage Catalonians.
Sentiment and inflation will drive the euro
Tuesday will see the first data release for the euro with the ZEW economic sentiment figures for the Eurozone area and Germany. Sentiment has been dampened by the lockdowns but there is some hope that the recent loosening of restrictions in the likes of France could see the tide turning for business expectations and confidence.
The following day will see inflation data from the German economy and a British 3 month GDP update for March. The German number could be the most important for the week with the figure expected to hit 2% from 1.7% last month. Central banks are trying to reassure investors that the inflationary outlook is “transitory” but if the markets decide otherwise then it may be hard to put the rabbit back in the hat.
The GDP number for the UK is priced in after recent upgrades from the EY ITEM club and Goldman Sachs both saw growth in the 6.3-7% level, while the BoE has upped that further to 7.2% for 2021.