GBP/EUR – Sterling Softened by Sharp Retail Sales Contraction
March’s retail sales figures eroded confidence in the health of the UK economy, with sales found to have contracted -1.5% on the month. This indicated that households are already starting to cut back on spending; a trend which only looks set to deepen as rising inflation and stagnant wages put pressure on the cost of living. If April’s GfK consumer confidence survey also points towards a weakening in domestic sentiment then the Pound could experience further downside bias. While markets remain confident that Theresa May will return to power with a larger Conservative majority, political developments may also put pressure on Sterling in the near term.
GBP/USD – Slowing UK Growth Could Limit Pound Demand
While public sector net borrowing was higher than anticipated in March the annual deficit for the 2016-2017 financial year was still found to have narrowed to its lowest level in nearly a decade. Although the government remains a long way from returning the country’s finances to a state of surplus this nevertheless offered a boost to the Pound on Tuesday. Greater volatility is likely in response to the first quarter UK gross domestic product report, which is expected to show that growth slowed from 0.7% to 0.4% on the quarter. With economic momentum set to slow further as the uncertainty of Brexit hangs over the domestic outlook, a weaker showing here would dent the appeal of Sterling.
USD/GBP – US Dollar Benefits from Tax Cut Talk
News that Donald Trump is proposing that corporation tax be cut from 35% to just 15% prompted increased demand for the US Dollar. Investors were encouraged by the prospect of a looser tax regime, even though the reforms will need to pass through Congress. Given the significant hole the proposals could create in the US budget there could be some pushback, potentially limiting the upside potential of the ‘Greenback’. Increased downside pressure may be in store for USD exchange rates if the first quarter gross domestic product data proves disappointing. With forecasts pointing towards a loss of momentum within the world’s largest economy the mood of markets could sour ahead of the weekend.
EUR/USD – Bets on Macron Presidency Boosted Euro
The Euro experienced a strong relief rally after centrist Emmanuel Macron secured 23.8% of the votes in the first round of the French presidential election. With opinion polls giving him at least a 20 point lead over far-right opponent Marine Le Pen, markets have been encouraged to price out the risk of a Eurosceptic president. Even so, hopes are not high for the latest European Central Bank (ECB) monetary policy meeting. As policymakers are likely to maintain a relatively cautious outlook at this juncture the appeal of the single currency could soften, particularly if the prospect of tapering the quantitative easing program is dismissed.