GBP/EUR – Lower BoE Inflation Forecasts Dent Sterling Demand
Unsurprisingly the Bank of England (BoE) opted to leave interest rates on hold at its final meeting of the year, offering little in the way of support for Sterling. The Monetary Policy Committee (MPC) unexpectedly lowered its inflation forecasts for 2017, noting that the Pound has recovered significantly from its post-referendum lows. While this might be considered positive for the UK economy, the minutes were seen to reduce the chances of the BoE raising interest rates in the near future, prompting GBP exchange rates to slump. With little excitement expected from the finalised third quarter GDP data, the Pound may struggle to hold firm in the coming week.
GBP/USD – Pound Volatility to Continue on Brexit Speculation
Confidence in the Pound was not improved by November’s public sector net borrowing figure, which proved larger than forecast at 12.2 billion. This sharp increase in government debt underlined the vulnerability of the UK economy, with its wide trade deficit and the uncertainty of Brexit. Speculation over the government’s approach to negotiations has continued to provoke volatility for the Pound, especially with trade volumes a little more limited ahead of Christmas. Should signs point towards the UK losing its current level of access to the single market then the GBP/USD exchange rate is likely to slide further, although any losses may prove short-lived.
USD/GBP – Hawkish Fed Forecasts Boost US Dollar
Following the Fed’s decision to raise interest rates to 0.75% the US Dollar has remained on a generally stronger footing. The hawkish tone of policymakers encouraged greater confidence in the ‘Greenback’, with markets moving to price in the possibility of three further rate hikes in the coming year. Although US data has proved less than encouraging in the days since the policy decision, this has not been enough to dent the USD/GBP exchange rate. Even so, with forecasts pointing towards a marked contraction in November’s durable goods orders data the US Dollar could still come under pressure.
EUR/USD – Greek Bailout Worries Weigh on Euro Outlook
In spite of positive domestic data the Euro struggled to gain traction against its rivals thanks to resurgent worries over both Greece and Italy. While investors were concerned to hear that Monte dei Paschi only possessed enough cash reserves for four months, prompting shares in the bank to plunge 18%, there was some relief as Italian MPs approved plans to support the banking sector. However, this respite could prove to be temporary thanks to rising tensions between Greece and its creditors. If debt relief measures are not reinstated, this could lead to speculation of a fresh Eurozone crisis, a prospect which could weigh on the single currency heading into the end of the year.