GBP/EUR – Higher Inflation Could Raise Prospect of BoE Tightening
The first Bank of England (BoE) policy meeting of 2017 did not offer much encouragement for the Pound, even though policymakers raised their growth forecasts for the coming year. Markets were not particularly impressed to find that the Monetary Policy Committee (MPC) had continued to vote unanimously in favour of maintaining its current level of easing. This was seen to reduce the odds of the BoE returning to a hawkish outlook in the coming months, limiting the appeal of the Pound. January’s UK Consumer Price Index report could push the Pound higher, though, with any increase in inflationary pressure likely to be welcomed by investors. So long as the UK economy continues to demonstrate resilience the odds of BoE tightening should be seen to improve.
GBP/USD – Weaker Wage Growth Forecast to Dent Pound
Fears that the UK remains on course for a hard Brexit increased as the government’s Article 50 bill progressed through Parliament and proposed amendments failed to be voted through. As the level of parliamentary scrutiny afforded to Brexit negotiations looks likely to be more limited than hoped, the outlook of the Pound deteriorated. While Brexit-based jitters are expected to continue to drag on Sterling, confidence in the resilience of the UK economy could be undermined by December’s labour market and wage data. Any softening in wage growth would point towards weaker consumer spending; something which has been a major driving force for the economy in recent months.
USD/GBP – Hawkish Fed Policymaker Boosted US Dollar
Comments from Philadelphia Fed President Patrick Harker offered encouragement to the US Dollar, with the policymaker suggesting that a March interest rate hike could still be on the table. This prospect naturally encouraged investors to pile back into the ‘Greenback’, particularly as the US trade deficit was found to have narrowed by more than forecast in December. Even so, January’s advance retail sales data could diminish the odds of imminent policy tightening, with consumer demand forecast to have slowed at the start of the year. If the controversial US travel ban is reinstated this could put renewed downside pressure on USD exchange rates.
EUR/USD – Euro Under Pressure from Greek Debt Worries
The International Monetary Fund’s (IMF) latest assessment of the Greek economy prompted fresh concerns that the Fund may withdraw its support from the bailout program. As Eurogroup President Jeroen Dijsselbloem dismissed the fresh call for Greece to receive debt relief the mood towards the Euro soured, with the prospect of a renewed Eurozone crisis rising. If tensions rise further, or developments in the French presidential election spook investors, the single currency could fall further out of favour. However, the EUR/USD exchange rate could rally if the fourth quarter German GDP figures show a solid improvement as forecast.