Pound Euro Exchange Rate: Politics Remains Key Sterling Headwind
A better-than-expected narrowing of the UK visible trade deficit buoyed the Pound last Friday, and the latest production data also helped paint a more optimistic picture of the domestic outlook.
GBP Exchange Rates Dented by Disappointing UK Inflation Data
However, political concerns soon saw GBP exchange rates return to a softer footing as confidence in Theresa May’s leadership started to waver once again.
Reports that 40 MPs are prepared to sign a letter of no confidence in the Prime Minister raises the risk of a fresh leadership challenge, with only eight more signatures needed to trigger a contest.
With markets still lacking any real clarity over Brexit and negotiations failing to show any meaningful signs of progress, Sterling is rather lacking in appeal.
UK Parliament Debates EU Withdrawal Bill
As Parliament debates the EU withdrawal bill and its various amendments the Pound looks vulnerable, especially if the odds of a no deal scenario are seen to increase.
Pound US Dollar Exchange Rate: Sterling Slumps as Wage Squeeze Persists
October’s UK consumer price index failed to impress, with inflation holding steady at 3.0% on the year rather than rising to 3.1% as forecast.
This disappointed markets, raising suggestions that inflation may have already hit its peak and encouraging the Pound to trend lower across the board.
As average weekly earnings continued to trail significantly behind inflation, the chances of any further Bank of England (BoE) monetary tightening also diminished.
There are concerns that the Bank may have acted too soon when it opted to raise interest rates at its November policy meeting.
If the latest retail sales data offers further evidence that consumers are reining in their spending thanks to the ongoing wage squeeze, this is likely to weigh heavily on GBP exchange rates.
USD GBP Exchange Rate: Resilient Housing Market Could Boost US Dollar
While a December Federal Reserve interest rate hike remains priced in as a near-certainty, this has failed to prevent the US Dollar coming under some pressure.
Signs that the Trump administration’s promised tax reforms will not materialise as soon as investors hoped have weighed on the ‘Greenback’.
USD Exchange Rates Jittery on Tax Reform Worries
USD exchange rates were also undermined by a surprise dip in the latest University of Michigan sentiment index, which suggests that consumer confidence is starting to falter.
However, if October’s housing starts and building permits figures show a rebound after September’s sharp contractions this may offer some support to the US Dollar.
As long as markets remain jittery and risk-averse, any ‘Greenback’ losses are likely to be limited.
EUR USD Exchange Rate: German Economy Remains Dominant
Germany’s third quarter gross domestic product data surprised to the upside, with growth accelerating from 0.6% to 0.8% on the quarter.
The Italian economy also offered a pleasant surprise to investors, encouraging bets that the Eurozone will outstrip the US in terms of growth for a second consecutive year.
A surprise widening of the Eurozone trade surplus added to the bullishness of the Euro on Wednesday, offering further evidence of the robustness of underlying economic conditions.
Even so, this strong uptrend leaves EUR exchange rates vulnerable to renewed pressure if the European Central Bank (ECB) maintains its dovish message.
With the finalised Eurozone consumer price index data expected to confirm a slight easing in inflationary pressure, the mood towards the single currency could sour somewhat ahead of the weekend.