GBP/EUR – BoE Forecasts Failed to Boost Pound
Disappointment greeted the Bank of England’s (BoE) May policy decision, as investors had hoped to see a second hawk joining Kristin Forbes in voting for an immediate interest rate hike. Coupled with a quarterly Inflation Report that featured forecasts based on the UK achieving a smooth Brexit, this cemented market expectations that the BoE will remain on hold for some time to come. While the general election campaign intensifies the impact on the Pound is likely to remain limited, given that the Conservatives still appear on track to secure a larger majority. However, if the polls indicate any particular shift away from Theresa May’s party GBP exchange rates could experience a fresh bout of volatility.
GBP/USD – Rising Inflation Continues to Outpace Wages
Sterling also weakened in response to the news that UK inflation had climbed to a four-year high of 2.7% in April, indicating a further intensification of the wage squeeze. With the BoE unlikely to respond to anything less than a substantial acceleration in inflationary pressure, this result only served to erode confidence in the Pound. As wage growth in the three months to March also lagged some way behind rising inflation, the signs continue to point towards households facing greater financial pressure. Even so, if April’s retail sales data shows that spending rebounded on the month the Pound could find some cause for confidence. Any fresh disappointment, though, could see GBP exchange rates soften further.
USD/GBP – Political Developments Weigh on US Dollar
Fresh scandal in the White House put pressure on the ‘Greenback’ this week, with markets starting to speculate that the Trump administration may struggle to survive. Worries that Trump will not be able to deliver on his much-anticipated tax reforms took much of the wind out of the US Dollar’s sails, especially as domestic housing market data also proved disappointing. As the odds of a June interest rate hike from the Federal Reserve have eased somewhat investors have seen little reason to favour the ‘Greenback’. If upcoming comments from Fed policymakers prove more cautious in tone, the US Dollar could extend its recent losses. On the other hand, improved jobless claims figures may encourage something of an uptrend if political jitters start to ease.
EUR/USD – Greek Parliament to Vote on Fresh Austerity Measures
Success for Angela Merkel’s CDU party in a state election over the weekend encouraged greater confidence in the outlook of the Eurozone. As new French president Emmanuel Macron was also quick to pledge his support to greater European unity the appeal of the Euro picked up further. A sharp widening of the Eurozone trade surplus also encouraged demand for the single currency, indicating that the domestic economy remains in a robust state of health. However, if European Central Bank (ECB) President Mario Draghi maintains a dovish tone in comments on Thursday the mood towards the Euro could sour once again. Developments in Greece could also weigh on EUR exchange rates, with parliament set to vote on the latest raft of creditor-mandated tax reforms and pension cuts amidst fresh anti-austerity protests.