GBP/EUR – Resilient Service Sector Shored up Pound Confidence
Both the UK manufacturing and construction PMIs for March proved disappointing, weighing on the Pound as confidence in the health of the economy faltered. However, the corresponding services PMI ultimately bettered expectations and demonstrated strong growth even as consumer-focused sectors struggled. This shored up optimism in the economic outlook of the UK and boosted GBP exchange rates, even though greater pressure may be in store as Brexit negotiations get underway. However, if comments from Bank of England (BoE) Governor Mark Carney indicate that the central bank will remain on a neutral bias for the foreseeable future Sterling is likely to return to a weaker footing.
GBP/USD – Sterling Volatility to Persist Ahead of Brexit Negotiations
Disagreement over the issue of Gibraltar saw tensions between the UK and EU rise at the start of the week, raising concerns that the next two years of negotiations will be fraught. If politicians continue to take a relatively hard line of rhetoric this could diminish the appeal of Sterling, particularly if the UK looks set for a ‘cliff edge’ exit. Any widening of the UK trade deficit could also put downside pressure on GBP exchange rates, given the uncertain trade outlook. However, if the NIESR gross domestic product estimate for the first quarter points towards resilient growth, the Pound could find a fresh rallying point.
USD/GBP – Solid Labour Market Could Raise Odds of Fed Rate Hike
Although the US manufacturing sector was found to have lost some steam in March this was not enough to weigh down the ‘Greenback’. With market risk appetite generally increased, investors saw little reason to sell out of the safe-haven US Dollar even as domestic politics created jitters. USD exchange rates could strengthen further if Friday’s non-farm payrolls report proves positive, even though the headline figure is expected to have dipped on the month. Continued strength in the labour market could increase the pressure on the Federal Reserve to adopt a faster pace of interest rate hikes, to the benefit of the US Dollar.
EUR/USD – Falling Unemployment Boosted Euro Outlook
As unemployment in Germany and the Eurozone as a whole fell to multi-year lows in February, the appeal of the Euro strengthened. Confidence in the outlook of the currency union was also boosted by a solid raft of PMIs, which showed that growth remained solid at the end of the first quarter. Comments from European Central Bank (ECB) President Mario Draghi could weigh on demand, however, if he maintains a relatively cautious outlook on monetary policy. However, if Draghi makes any suggestions regarding the tapering of the ECB quantitative easing program the EUR/USD exchange rate could benefit from renewed market speculation. Worries over Greece could equally limit demand for the single currency in the near term as the latest bailout review continues to lack resolution.