GBP/EUR – UK Credit Rating Downgrade Dented Pound
Reaction to Theresa May’s Florence speech proved unenthusiastic, with the Pound slumping sharply in spite of mentions of a potential transition period.
Investors were further discouraged as ratings agency Moody’s opted to lower its UK rating from Aa1 to Aa2, citing the uncertainty of the domestic outlook.
Altogether this did not paint the most optimistic picture for the UK economy, although the Pound recovered some ground at the start of the week thanks to the softness of its rivals.
Even so, if Friday’s GfK consumer confidence survey points towards a weakening in domestic optimism then further losses could be in store for Sterling. With key Brexit issues still far from resolved the upside potential of GBP exchange rates remains limited.
GBP/USD – BoE Rate Hike Odds Could Weaken
As markets are continuing to bet on the likelihood of the Bank of England (BoE) raising interest rates before the end of the year the Pound could be vulnerable to any weaker-than-expected data.
While Tuesday’s BBA loans for house purchase figure pointed towards greater resilience within the UK housing market the economic outlook remains far from optimistic.
An uptick in August’s net consumer credit data could weigh heavily on Sterling, given the warnings that the BoE has sounded over the increasing reliance on debt amongst consumers. This could be enough to dampen the appeal of an imminent rate hike, leaving the Pound vulnerable to further downside pressure.
USD/GBP – US Dollar Benefits from Safe-Haven Demand
A fresh escalation in tensions between North Korea and the US added to the more risk averse mood of markets this week, offering support to the safe-haven ‘Greenback’. While September’s US consumer confidence index showed an unexpected deterioration this was not enough to dent USD exchange rates.
Fed Chair Janet Yellen continued to take a rather hawkish tone in her latest comments on monetary policy, noting that there is a risk to ‘moving too gradually’. As this suggests that the Federal Reserve is on track to raise interest rates again before the end of the year the US Dollar extended its bullish run further.
Unless there is a significant downside surprise from the latest inflation data the ‘Greenback’ is thus likely to remain on a stronger footing.
EUR/USD – Political Uncertainty Diminishes Euro
Markets were not impressed by the outcome of the German election, as Angela Merkel won on a smaller share of the vote and the far-right AfD party made significant inroads.
This suggests that the push towards greater integration within the Eurozone is likely to weaken, with investors also spooked by Catalonia’s attempts to hold an independence referendum.
A growing sense of political uncertainty within the currency union weighed heavily on the Euro, prompting it to trend sharply lower across the board.
However, if Germany’s consumer price index shows a fresh uptick in September this could offer EUR exchange rates a rallying point. Any signs of growing inflationary pressure within the Eurozone may prompt the European Central Bank (ECB) to take a more hawkish outlook.