GBP/EUR – Pound makes gains despite BoE easing expectations
Ahead of the August Bank of England (BoE) policy announcement the Pound made some moderate gains against the Euro, despite expectations for policymakers to cut interest rates to a fresh record low. Investors have shown a rather limited reaction to a poor raft of post-Brexit data, even though the UK economy appears to have dramatically slowed in the wake of the referendum result. The Pound is likely to see some pronounced volatility is response to the BoE’s decision, particularly if the central bank fails to deliver on policy easing already priced into the currency. If rates are cut more dramatically than expected or a greater level of loosening is announced then Sterling is expected to resume its recent slide.
GBP/USD – Downside pressure mounts as UK economy shows signs of slowing
Economists are increasingly wary of the possibility of the UK economy slipping into recession in the wake of a sharp weakening in the July PMIs. These indicators of activity in the manufacturing, construction and services sectors all evidenced a contraction as a result of Brexit-based uncertainty, suggesting that the economic outlook is less-than-encouraging. The major UK data of the week ahead is expected to offer limited support to the Pound against the buoyant US Dollar, given that the figures will exclusively refer to the pre-referendum economy. However, if industrial and manufacturing production is shown to have weakened in June further softness could be in store for Sterling.
USD/GBP – US Dollar volatility expected on latest Non-Farm Payrolls report
Despite rather hawkish comments from the Dallas and New York Fed Presidents, investors have continued to assess the odds of the Federal Reserve raising interest rates before the end of the year as minimal. This has removed some support from the US Dollar, particularly as domestic data has proven a little more mixed than policymakers might like. Friday’s Non-Farm Payrolls report could push the ‘Greenback’ onto a stronger footing against rivals, providing that the US job market demonstrates fresh signs of tightening. Forecasts are for the unemployment rate to have dipped in July, a robust sign that could increase speculation over the possibility of an imminent Fed rate move.
EUR/USD – Weaker German factory orders could weigh on the Euro
The Euro made some strong gains against the US Dollar in the early part of the week, particularly following unexpectedly strong Eurozone GDP and inflation data. Although inflationary pressure within the currency union remains a far cry from the European Central Bank’s (ECB) 2% target at just 0.2% this was nevertheless an encouraging improvement. Even so, concerns over the European banking sector have continued to exert negative pressure on the single currency despite optimistic stress test results. Confidence in the robustness of the German economy could be dented by the June factory orders result, which is expected to show a sharp contraction in demand. If the Eurozone’s powerhouse economy displays signs of slowing then the EUR/USD exchange rate is likely to weaken.
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