GBP Forecast: Pound Retreats against Euro, US Dollar as Weaker Inflation Dampens BoE Rate Hike Odds

GBP/EUR – Falling Inflation Dampens BoE Rate Hike Hopes

Unsurprisingly, investors reacted with disappointment to news that the UK consumer price index had eased from 3.1% to 3.0%, leaving the Pound on a weaker footing.

While this suggests inflation is moving back towards the Bank of England’s (BoE) 2% target it also reduces the odds of policymakers voting to raise interest rates again in the near future.

With the BoE now looking likely to leave monetary policy unchanged in the coming months, Sterling sentiment has soured, as investors were hoping to see further action this year.

Given the major role that consumer spending has in driving domestic economic growth, any softness in December’s UK retail sales may put additional downside pressure on GBP exchange rates.

GBP/USD – EU Finance Ministers Deny Reported Push for Soft Brexit

Reports that the Spanish and Dutch finance ministers had agreed to push for a softer form of Brexit saw GBP exchange rates strengthen sharply on Friday.

The boost from this news, however, proved to be relatively short-lived as both nations were quick to deny suggestions.

The likely outcome of Brexit negotiations remains far from clear at this juncture, leaving Sterling vulnerable to further volatility as markets try to gauge sentiment on both sides of the Channel.

In the meantime, confidence in the Pound is likely to remain somewhat muted in anticipation of December’s public sector net borrowing figure.

Any substantial increase in government debt would give investors fresh cause for concern, highlighting the UK economy’s vulnerability to any deterioration in trade conditions.

USD/GBP – Strong Consumer Sentiment to Boost USD Demand

With the headline US consumer price index dipping from 2.2% to 2.1% in December, there was little in the way of support for the USD/GBP exchange rate.

Weaker-than-expected advance retail sales added to the bearish mood of US Dollar investors, undermining confidence in the health of the world’s largest economy.

Nevertheless, the US Dollar found renewed support this week thanks to a general weakening in market risk appetite and a softer Euro.

With forecasts pointing to a solid uptick in the latest University of Michigan consumer sentiment index, USD exchange rates could regain further ground ahead of the weekend.

If Federal Reserve policymakers continue to demonstrate a split on the subject of monetary policy this could have the effect of limiting the appeal of the US Dollar.

EUR/USD – ECB Speculation Weighs on Euro Exchange Rates

While markets reacted positively to news of a preliminary agreement being struck between Angela Merkel’s CDU and the SPD, this failed to boost the Euro for long.

Hopes that a new ‘grand coalition’ could be on the cards were swiftly extinguished as the Berlin branch of the SPD voted against opening formal negotiations with the CDU.

The ongoing sense of German political malaise weighed heavily on EUR exchange rates. Dovish comments by European Central Bank (ECB) vice president Vitor Constancio did little to improve the outlook.

With investors seeing less chance of the ECB returning to a monetary tightening bias in the coming months, much less at next week’s policy meeting, the upside potential of the Euro is rather limited.

If German coalition talks do ultimately fall through this could see the EUR/USD exchange rate slump sharply.

John Cameron

John studied economics at Cambridge University and later became an MSTA qualified Technical Analyst. He began working for TorFX almost a decade ago and now holds a Senior Account Manager position. As well as lending his clients support and guidance, John has produced market commentary and detailed exchange rate analysis for a number of online publications.

Contact John Cameron


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