GBP/EUR – Hung Parliament Prompted Sharp Pound Downtrend
Markets were largely caught off guard by the results of the UK snap general election, where the Conservatives lost their majority. Although Theresa May was quick to put forward her intention to form a minority government this was not enough to prevent the Pound falling to multi-week lows against its rivals. While the weakening of May’s support base raised hopes of a softer approach to Brexit investors remained relatively reluctant to pile back into Sterling. With the formal start to Brexit negotiations now just days away market jitters are likely to persist, as the threat of an exit via the cliff-edge continues to hang over the UK economy.
GBP/USD – Sterling Softer as Real Pay Squeeze Intensified
Confidence in the Pound remained limited as an unexpected uptick in inflationary pressure and weaker wage growth pointed towards a deepening squeeze on consumers. Given that the UK economy is heavily reliant on strong levels of consumer spending to drive growth this weighed heavily on GBP exchange rates. Even so, the Pound strengthened sharply as the Bank of England (BoE) proved unexpectedly split on interest rates. Policymakers voted 5-3 in favour of leaving rates on hold, prompting speculation that tighter monetary policy could come sooner rather than later. However, as key hawk Kristin Forbes is set to depart the Monetary Policy Committee (MPC) before the next meeting Sterling is unlikely to hold onto its initial gains for long.
USD/GBP – Dovish Hike Speculation Limited US Dollar Appeal
With an imminent Federal Reserve interest rate hike already priced into the US Dollar its upside potential has been relatively limited this week. As both May’s monthly budget statement and NFIB small business optimism index proved disappointing confidence in the health of the world’s largest economy weakened. However, as the Fed took a slightly more optimistic tone on Wednesday night the ‘Greenback’ was encouraged to make fresh gains across the board. Providing the latest University of Michigan confidence index indicates an improvement on the month USD exchange rates are likely to maintain a bullish run ahead of the weekend.
EUR/USD – Parliamentary Landslide for Macron to Boost Euro
Although the European Central Bank (ECB) sounded a slightly more optimistic tone at its June policy meeting this was accompanied by a downward revision to its inflation forecasts. This suggested that the central bank is still a long way from returning to a policy tightening bias, putting renewed pressure on the Euro. Weaker German data also encouraged the single currency to soften. However, if the latest Eurogroup meeting leads to the disbursement of the next tranche of Greek bailout funds the mood towards EUR exchange rates could improve. A strong showing for President Emmanuel Macron’s En Marche movement in the French parliamentary elections could also improve the appeal of the Euro.