GBP/EUR – Pound Recovers from 10-Month Low
Sterling dropped to a 10-month low against the Euro last week as UK public sector net borrowing proved higher than anticipated in June, indicating a greater widening of the national deficit.
This increase in government debt weighed heavily on the appeal of the Pound, highlighting the country’s vulnerability to any significant deterioration in trade conditions.
Worries over the outcome of Brexit negotiations also limited demand for Sterling, with some way still to go before the shape of the economy’s future becomes clear.
While a slight uptick in quarterly output in Q2 lent Sterling some support, a deterioration in the GfK consumer confidence index could exacerbate the softness of the Pound ahead of the weekend, given that resilient domestic spending has helped drive growth in the wake of the EU referendum.
GBP/USD – UK Growth Picked up Modestly in Second Quarter
The second quarter UK gross domestic product report offered no surprises to investors, pointing towards growth of 0.3% on the quarter.
Sterling strengthened on the back of this modest improvement, with markets relieved that economic activity picked up somewhat after a poor start to the year. However, as the service sector remained the primarily driver of UK growth there are concerns as to whether the economy will be able to regain further momentum in the coming months.
As the odds of the Bank of England (BoE) returning to a tightening bias seem increasingly limited the Pound looks set to remain on a weaker footing in the near term. GBP exchange rates are thus likely to trend lower ahead of next week’s BoE policy meeting.
USD/GBP – US Dollar May Slump on Cautious Fed
July’s US consumer confidence index showed an unexpected uptick on the month, suggesting that the mood within the domestic economy remains generally optimistic.
This helped to shore up the US Dollar, counteracting the weakness of other recent US data. Higher levels of consumer confidence should translate into an increase in spending, boding well for the health of the domestic economy in the coming months.
Even so, if the Federal Reserve fails to adopt an optimistic outlook at its July policy meeting this could weigh heavily on the ‘Greenback’. With a third 2017 interest rate hike looking less likely, the upside potential of USD exchange rates could be generally limited.
EUR/USD – Weaker German Inflation Could Dent Euro
Market reaction to the latest commentary from European Central Bank (ECB) President Mario Draghi proved distinctly volatile. Initially the Euro was boosted sharply by Draghi’s note that the central bank will discuss its quantitative easing program in the autumn, prompting speculation that tapering could come as soon as September.
Ultimately, however, this overreaction from investors left the single currency vulnerable to fresh losses. Even so, the mood towards the Euro could pick up again if Friday’s German consumer price index betters expectations.
Any uptick in inflationary pressure would encourage investors to pile back into EUR exchange rates in spite of the limited likelihood of any imminent hawkish shift from the ECB.