GBP/EUR Weakens as Inflation Accelerates and Wage Squeeze Deepens
Although UK inflationary pressure accelerated to 3% in September this was not enough to keep Pound Sterling (GBP) exchange rates on a bullish footing for long.
While the Bank of England (BoE) has already warned that its tolerance for above-target inflation is wearing thin, the prospect of an imminent interest rate hike is still not a done deal.
As average weekly earnings only picked up to 2.2% in the three months to August, the domestic wage squeeze looks set to continue for some time to come.
With a large degree of recent economic growth having been driven by high levels of consumer spending, any further erosion of household finances does not bode well for the domestic outlook.
If Thursday’s retail sales data indicates that spending has already started to weaken, markets could continue to re-evaluate the odds of the BoE raising interest rates in November.
Lack of Brexit Progress Undermines GBP/USD Exchange Rate
Theresa May’s dinner meeting with chief EU negotiator Michel Barnier and European Commission President Jean-Claude Juncker did not appear to break the current deadlock in Brexit negotiations.
Although there was a pledge to speed up talks, this is not necessarily a sign that any meaningful progress towards an agreement is on the horizon.
Unless Brexit talks are given the go-ahead to proceed to the next phase, discussing a transition deal and future arrangements, the Pound is likely to remain vulnerable.
Any hardening of rhetoric on either side of the Channel could also weigh on GBP exchange rates, with worries over Brexit set to dominate the outlook for some time to come.
Hawkish Yellen Commentary May Prompt Further USD/GBP Gains
Markets remain generally confident in the prospect of the Federal Reserve raising interest rates before the end of the year, limiting the downside potential of US Dollar (USD) exchange rates.
Domestic data has proved largely positive in recent days, with a solid rebound in industrial production demonstrating the more limited economic impact of the hurricane season on the US economy.
Even so, the ‘Greenback’ is still vulnerable to any signs that the Fed may adopt a less aggressive pace of monetary policy going forward.
If the latest Fed Beige Book fails to paint a more optimistic picture of the US economy and its inflationary prospects then the USD GBP exchange rate could trend lower.
However, commentary from Fed Chair Janet Yellen could boost the US Dollar ahead of the weekend if she maintains a hawkish tone.
Rising German Prices Could Support Euro to US Dollar Exchange Rate
An unexpected narrowing of the Eurozone trade surplus put some pressure on the single currency at the start of the week, undermining confidence in the domestic outlook.
Investors were also somewhat discouraged by a lack of positive progress towards a resolution of the Catalan crisis, as Spanish forces arrested two key separatists.
If the regional administration does not clarify its position on independence on Thursday, as the Spanish government has requested, the situation could deteriorate further.
This would put increased pressure on EUR exchange rates, prompting a resurgence in market worries over the future integrity of the currency union as a whole.
German producer price data could offer the Euro support ahead of the weekend, however, if the Eurozone’s powerhouse economy shows fresh signs of rising inflationary pressure.