GBP/EUR – Pound Remains Vulnerable to Brexit Developments
The much anticipated Supreme Court ruling on the Article 50 case ultimately prompted Sterling to weaken, in spite of the verdict upholding the judgement that an Act of Parliament is required to begin formal exit proceedings from the EU. This less favourable market reaction was prompted by concerns that a second Scottish independence referendum could be more likely, following the ruling that the consent of devolved governments is not required. While the prospect of greater parliamentary involvement should put upside pressure on the Pound going forward, Brexit-based jitters still have the potential to weigh on Sterling for the foreseeable future. If details of a promised white paper fail to convince investors that the government is taking a more moderate approach to negotiations then GBP exchange rates could return to a downtrend.
GBP/USD – Fourth Quarter UK GDP in Focus
December’s public finances figures proved discouraging, meanwhile, pointing to a further widening of the budget. Given the post-referendum weakness of the Pound, this was not seen to bode well for the domestic economy and added to the recent run of disappointing data. The appeal of Sterling could continue to diminish if the fourth quarter UK Gross Domestic Product report similarly undermines confidence in the resilience of the economy. Expectations are for growth to have slowed from 0.6% to 0.5% on the quarter, suggesting that the negative impact of Brexit could be coming to bear. However, if GDP betters expectations the Pound could rally strongly.
USD/GBP – Weaker Personal Consumption May Limit Fed Hike Bets
Demand for the US Dollar has been rather volatile in the wake of Donald Trump’s inauguration, with investors concerned by the lack of clear economic plans from the new administration. As the latest raft of domestic housing market data has also proven disappointing, there has been limited cause for confidence in the ‘Greenback’. While the odds of the Federal Reserve raising interest rates in the coming months have remained high, the fourth quarter personal consumption expenditure data could prove to be a dampener. Forecasts point towards a dip from 1.7% to 1.4%, which could discourage the Fed given that the measure is their preferred gauge of domestic inflation.
EUR/USD – Eurogroup Meeting Could Weigh on Euro
Unsurprisingly, the European Central Bank (ECB) opted to leave monetary policy unchanged at its January meeting. However, the tone taken by President Mario Draghi proved to be a little more dovish than anticipated, prompting the Euro to soften ahead of the weekend. The comment that policymakers have seen little evidence of a meaningful increase in inflation could continue to limit the appeal of the single currency in the near future. Developments at the latest Eurogroup meeting may put additional downside pressure on the single currency, with the Greek bailout issue still unresolved.