GBP/EUR – Rising UK Inflation Failed to Encourage Investors
Sterling suffered a disappointment when January’s consumer price index failed to show as strong an uptick in inflationary pressure as forecast. This undermined investors’ hopes that the Bank of England (BoE) could be prompted to tighten monetary policy sooner rather than later, leaving the Pound with little in the way of support. Brexit-based jitters could limit the appeal of Sterling in the near future as the government’s Article 50 bill progresses through the House of Lords. If peers signal any amendments to the bill this could put Theresa May’s timetable in jeopardy, forcing the legislation to return to the House of Commons for further debate.
GBP/USD – Weaker Consumer Spending Could Dent Pound
Weaker-than-expected wage growth also weighed on GBP exchange rates this week, as this indicated that consumers are likely to see a greater squeeze on their income as inflation rapidly rises. As consumer spending has been one of the major driving factors of domestic growth in the wake of the referendum, this weaker showing naturally dented the Pound. Worries could mount further if Friday’s retail sales figures indicate that spending is already softening, boding ill for the outlook of the economy. However, if consumers continue demonstrating resilience Sterling could find a potential rallying point ahead of the weekend.
USD/GBP – Rate Hike Odds Boosted by Yellen Comments
Markets were pleasantly surprised by the more hawkish tilt of Fed Chair Janet Yellen’s comments to the Senate, with the US Dollar boosted by her note that it would be ‘unwise’ to wait too long before raising interest rates again. This was seen to boost the chances of an imminent rate hike, helping to mitigate the negative impact of recent political developments in the US. Even so, worries over the health of the new administration could weigh on the ‘Greenback’ as calls for an investigation into ties with Russia look set to intensify. If the Philadelphia Fed business outlook index does not offer cause for confidence in the robustness of the US economy the US Dollar may struggle to hold onto its bullish outlook.
EUR/USD – Eurozone Growth Struggled to Live up to Forecasts
Despite upbeat forecasts from the European Commission, both Germany and the Eurozone as a whole were found to have experienced weaker-than-expected growth in the fourth quarter of 2016. This put renewed downside pressure on the Euro, particularly as creditors returned to Greece with an aim to breaking the deadlock and concluding its latest bailout review. However, if European creditors continue to demand additional austerity measures and refuse to grant debt relief the single currency could fall further out of favour. Demand for the Euro could be boosted if the account of the European Central Bank’s (ECB) monetary policy meeting proves to be less dovish in tone, even if the prospect of policy tightening remains slim.