GBP/EUR – Weak Inflation Dents BoE Rate Hike Odds
Confidence in the Pound took a sharp blow as June’s UK consumer price index fell short of forecast. Investors were not impressed to find that inflationary pressure had dipped from 2.9% to 2.6%, even though this signalled some easing in the squeeze on wages.
This weaker level of inflation seems to remove some of the pressure on the Bank of England (BoE) to consider raising interest rates from record lows in the near future, to the disappointment of markets.
Even so, if the latest retail sales figures show an uptick in consumer spending this could offer GBP exchange rates a rallying point ahead of the weekend.
GBP/USD – Brexit Continues to Limit Pound Upside
Political jitters dampened the mood towards Sterling once again as fresh reports of cabinet infighting emerged, highlighting the continued fragility of the minority Conservative government.
Brexit negotiations are still casting uncertainty over the outlook of the domestic economy, with government disarray having the potential to see the UK depart the EU without any replacement deal in place. However, with Parliament on summer recess the Pound may benefit from a diminished sense of political instability, even as the question of Brexit persists.
If Friday’s public sector net borrowing figure points towards a lower level of new government debt this could bolster the appeal of the Pound.
USD/GBP – US Dollar Softened as Market Optimism Faded
Markets have been revising the odds of the Federal Reserve raising interest rates again before the end of the year, with doubts growing over the central bank’s willingness to pursue an aggressive pace of tightening.
A weaker-than-expected consumer price index and advance retail sales figures weighed heavily on the US Dollar, indicating that the world’s largest economy is not in such a robust state of health at present.
An improvement in the latest jobless claims data could encourage greater demand for the ‘Greenback’, with a tighter labour market likely to help maintain some degree of Fed hawkishness.
EUR/USD – Dovish ECB Could Extend Euro Losses
The Euro came under renewed pressure in anticipation of the European Central Bank’s (ECB) July policy meeting, with the ZEW economic sentiment surveys pointing towards a weakening in domestic confidence.
Policymakers are expected to maintain a relatively cautious outlook at this juncture, limiting the odds of any imminent tapering of the quantitative easing program and diminishing the upside potential of the single currency.
However, if President Mario Draghi is seen to adopt a more hawkish tone on monetary policy this could see the Euro strengthen sharply across the board on Thursday.