GBP/EUR – Bullish Services PMI Could Encourage Sterling Rally
Both the UK Manufacturing and Construction PMIs for December markedly bettered forecasts, offering further evidence that the initial negative impact of the Brexit vote has faded. These latest signs of strength within the economy offered support to the Pound, although this positive data was not enough to entirely overshadow the latest political turmoil. Nevertheless, hopes for the corresponding Services PMI were boosted. So long as the service sector demonstrates a similar level of growth Sterling could experience a more substantial rally ahead of the weekend, given the sector’s major role in the domestic economy.
GBP/USD – Loss of EU Ambassador Prompted Pound Volatility
The resignation of the UK’s ambassador to the EU put substantial pressure on the Pound on Tuesday, reigniting concerns over the upcoming Brexit negotiations. A sense of uncertainty returned to haunt investors, prompting GBP exchange rates to slump in response as concerns mounted over the government’s state of readiness. If signs appear to point towards a harder form of Brexit then the appeal of Sterling could decline further, even if the economy continues to demonstrate its resilience to market jitters. On the other hand, should Prime Minister Theresa May indicate a softer approach to negotiations the Pound could recover more of its lost strength.
USD/GBP – Fed Minutes Predicted to Boost ‘Greenback’
A solid ISM manufacturing index got the US Dollar off to a strong start to the year, indicating that the world’s largest economy remains in a robust state. However, a general mood of market risk appetite weighed on the ‘Greenback’ as investors were inclined to favour higher-yielding currencies. The underlying trend of the US Dollar remains bullish even so, fuelled by expectations that the Federal Reserve will raise interest rates multiple times over the course of 2017. If December’s Fed meeting minutes reaffirm this hawkish outlook then the USD/GBP exchange rate could trend higher, although volatility should also be expected in response to the latest Non-Farm Payrolls report.
EUR/USD – Strong Eurozone Inflation Raised Prospect of ECB Hawkishness
Confidence in the outlook of the Eurozone economy was boosted by a stronger-than-expected December Consumer Price Index, which rose from 0.6% to 1.1% on the year. This pick up in domestic inflation encouraged speculation that the European Central Bank (ECB) could take a more hawkish view on monetary policy, potentially bringing forward the end to quantitative easing. Even so, the single currency remains fragile due to the negative political headwinds mounting within the currency union. Any indication of early Italian elections could put severe downside pressure on the Euro, regardless of the nature of domestic data.