GBP/EUR – Gains after UK Labour Data Trumped Expectations
Although the Pound to Euro exchange rate is still holding a weaker level than pre-Brexit, Sterling has steadily recovered a large chunk of losses. Although the Euro wasn’t adversely impacted by Brexit initially, the threat of contagion and EU instability has seen the single currency dampen considerably of late. On Wednesday the Pound extended gains following positive domestic labour market data, even though it pertained to pre-Brexit Britain. Unemployment dropped to its lowest level since 2005, suggesting that the uncertainty in the build-up to the EU referendum did not adversely impact on the labour market as many had feared it would. Also supportive of demand for Sterling was the stabilisation of the political landscape after Theresa May swiftly succeeded David Cameron as Prime Minister.
GBP/USD – Edge Higher despite Safe-Haven Demand
The US Dollar strengthened against the majority of its asset peers. However, the GBP USD exchange rate is holding gains thanks to traders taking advantage of Sterling’s low trade weighting. Safe-haven demand has seen the US Dollar strengthen considerably of late. A succession of positive ecostats also supported demand for USD, not least because market odds of a benchmark interest rate hike from the Federal Reserve this year have improved significantly. However, US Dollar overvaluation may prove a major issue with regards to export growth and Federal Reserve policy outlook. If the Fed hikes rates, the US Dollar will strengthen further. This will limit foreign investment and see exports slump.
USD/GBP – Will the Fed Talk Down USD?
Given that the domestic economy is showing signs that tighter monetary policy would be appropriate, there is a high chance that Federal Reserve officials will look to jawbone in order to bring USD to levels that can handle a hike. The USD/GBP exchange rate may continue to cede ground if Sterling continues to advance on corrective trade. However, the likelihood that the Euro will continue to struggle may prevent significant US Dollar losses.
EUR/USD – Cools as Safe-Haven Demand Pushes Bond Prices Higher
The Euro faces several headwinds. One of the major issues is the rising price of bonds amid heightened demand for safe-haven assets. This has caused yields to fall, effectively limiting the impact of the European Central Bank’s (ECB) asset purchase programme. Also weighing on demand for the common currency are fears that the Italian banking crisis and Spain’s inability to meet with budget deficit targets will be a greater threat to EU stability than that of the Brexit. US Dollar strength is also likely to continue to limit the appeal of the Euro. Whilst the European Central Bank is not expected to alter policy this week, most analysts expect President Mario Draghi to deliver a dovish accompanying speech.