GBP/EUR Exchange Rates Softened by Widening UK Trade Deficit
While speculation over Theresa May’s tenure as Prime Minister calmed somewhat over the weekend a sense of political risk is still weighing on the Pound.
As there has been little sign of a breakthrough at the latest round of Brexit negotiations concerns remain over the prospect of a potential hard exit from the EU.
With the next phase of talks unlikely to commence on schedule GBP exchange rates are likely to remain biased to the downside for the foreseeable future. Any signs that a leadership challenge to May is gaining momentum could also weigh on Sterling in the coming days, with markets still somewhat lacking in confidence in the stability of the current government.
EUR Rates Recovere Ground as Catalan Independence eThreat Eases
Confidence in the UK outlook was shaken as August’s trade deficit widened further than forecast, highlighting the persistent vulnerability of the economy to any deterioration in trade conditions.
However, as this was coupled with a strong raft of industrial and manufacturing production data the Pound was spared from a sharp slump on Tuesday. Further volatility could be in store for GBP exchange rates on the back of the Bank of England’s (BoE) third quarter credit conditions survey.
Unless the BoE adopts a relatively upbeat view on the domestic economy this could dent the odds of an imminent interest rate hike, undermining the appeal of the Pound.
US Dollar Exchange Rates Shrugged Off Lacklustre Non-Farm Payrolls Data
Although September’s non-farm payrolls surprised significantly to the downside this failed to particularly weigh on the US Dollar.
While the headline figure clocked in at a disappointing -33,000 this was entirely attributable to the influence of the recent hurricanes, suggesting that there will be a solid rebound next month.
Investors were instead more interested in the latest wage growth data, which showed a marked improvement and boosted the odds of an imminent Federal Reserve interest rate hike.
If the Fed’s September meeting minutes add weigh to tightening expectations then the ‘Greenback’ could see further gains. An uptick in September’s consumer price index may also boost USD exchange rates, offering policymakers greater cause for confidence.
Euro Still Vulnerable to Catalan Crisis Developments
German data has proved largely impressive in recent days, with August’s trade surplus found to have widened further than forecast. This suggests that the Eurozone’s powerhouse economy remains in a robust state of health, even though ongoing coalition talks do cast something of a shadow over the outlook.
As Catalan president Carles Puigdemont stepped back from a unilateral declaration of independence on Tuesday, signalling a willingness to enter dialogue with the Spanish government, the sense of political uncertainty eased somewhat.
However, the potential for a fresh escalation in tensions remains. Commentary from various European Central Bank (ECB) policymakers could also provoke EUR volatility in the coming days, particularly if the general tone proves more dovish in nature.