GBP/EUR – Surges to 1.20 on political news
Continued ‘Brexit’ dovishness has kept the Pound weak recently, although developments in the Conservative party leadership contest have since sparked a bullish recovery. After the unexpected withdrawal of rival candidate Andrea Leadsom earlier in the week, Theresa May is set to be sworn in as the new PM by the end of the day. Today’s GBP/EUR exchange rate has undulated wildly around opening levels as investors struggle to reconcile the weakening effects of likely Bank of England (BoE) policy easing with the upside risks of a new Prime Minister.
More data pointing to the fallout from the UK’s ‘Brexit’ vote has been weighing on Sterling recently, however. A survey showed that an increasing number of employers were planning to reduce graduate intake in 2017, while another revealed that two thirds of companies intend to postpone or reduce spending in the UK for the rest of the year. The latter poll also revealed that ‘Brexit’ was now a greater source of concern for companies than the health of the Chinese economy.
Regardless of the headwinds, the GBP/EUR exchange rate has now recovered all of July’s losses.
GBP/USD – Moved away from over 30-year low
The market positivity that comes from the prospect of a new UK Prime Minister is keeping Pound Sterling around starting levels against the US Dollar today, but numerous headwinds are preventing a solid advance. Anticipation that the Bank of England will cut interest rates at tomorrow’s policy meeting has weighed on the Pound over the past few days. The most dovish forecasts suggest the BoE could slash borrowing costs to zero and resume quantitative easing. The general market consensus has been for a more moderate -0.25% cut. News that the UK has just sold £1.25 billion worth of bonds with a negative interest rate suggests that investors do not have confidence in other UK assets, such as stocks or the Pound. The inflation-linked Gilts, set for maturity in 2026, have been auctioned at an interest rate of -1.578%.
USD/GBP – Fed officials split on future path of interest rates
US traders remain without a reason to expect monetary policy tightening from the Federal Reserve in the short-term. Recent comments from Fed officials have shown that policymakers remain as divided as ever; Neel Kashkari has suggested patience in raising rates, while Loretta Mester looks to gradual rate increases over the coming months. The markets have paid her little heed, however, with Fed funds futures suggesting a 98.8% chance of a rate freeze and a 1.2% chance of a rate cut to 0.25%. Non-existent hopes of policy tightening have therefore seen USD/GBP losing a lot of ground over the past week. There is plenty more to come from the Fed today, with speeches by Robert Kaplan and Patrick Harker still to come, as well as the latest Fed Beige Book.
EUR/USD – Euro soft as investors scramble for negative German bonds
Italy’s banking crisis continues to play on the minds of investors, while news that Spain and Portugal could be fined for breaching EU budget deficit targets will only add to tensions. Investor dovishness was evident after the latest German government debt auction, in which the debt management office auctioned ten-year bunds with negative yields for the first time in history. Investors who bought these were willing to pay above the face value of the bond, meaning they will lose money for lending to the German government if they hold the debt to maturity. The Euro’s mild correctional rebound after yesterday’s weakness has remained soft thanks to continuing concerns over the economic health of certain member states.