GBP/EUR – Pound at Best Levels Since December, but Weaker Fourth Quarter UK GDP Forecast
While December’s UK public sector net borrowing figure showed a smaller uptick on the month than forecast, this failed to particularly shore up the Pound.
Continued signs of disunity within Theresa May’s cabinet have limited the appeal of Sterling, with the Prime Minister still lacking any particular appearance of strength.
After December’s weaker-than-expected retail sales figures, confidence in the outlook of the UK economy remains rather muted, with signs pointing towards consumers continuing to tighten their belts.
Further pressure could be in store for GBP exchange rates if the provisional fourth quarter gross domestic product data proves disappointing.
Any loss of momentum is likely to weigh heavily on the mood towards the Pound, raising concerns over the continuing impact of Brexit-based uncertainty.
GBP/USD – Sterling Strikes Best Levels Since EU Referendum
In a surprising boost to GBP exchange rates, UK weekly earnings excluding bonuses picked up 2.4% in the three months to November, indicating some modest improvement in domestic wage growth.
Even though this is still significantly short of the current inflation rate of 3.0% this uptick still encouraged investors to pile back into the Pound, raising hopes that the wage squeeze will ease further. Sterling accordingly surged to its best levels against the US Dollar since the Brexit vote in 2016.
However, this may not be enough to prompt the Bank of England (BoE) to return to a more hawkish policy outlook in the near future.
Unless BoE Governor Mark Carney sounds a more confident note on the domestic outlook in an upcoming speech, the GBP/USD exchange rate may struggle to maintain its bullish run.
USD/GBP – US Dollar Pressured by Political Concerns
Although the US government shutdown proved to be relatively short-lived, this failed to offer much encouragement to USD exchange rates.
Markets remain rather wary of the prospect of further disruption as a result of the Trump administration’s policies and approach, especially as the risk of a trade war appears to be escalating.
Worries over the future of NAFTA have also limited the appeal of the US Dollar, with the fate of the trade agreement still looking decidedly uncertain as a result of the increasingly isolationist outlook of the US.
Any signs that the economy is losing momentum in the fourth quarter gross domestic product data could see USD exchange rates shedding further ground ahead of the weekend, even if the headline growth rate remains relatively strong.
EUR/USD – Dovish ECB Outlook May Reverse Bullish Euro Trend
Demand for the Euro has remained strong, with the latest raft of ZEW economic sentiment surveys and finalised Eurozone consumer confidence index for January all bettering expectations.
This continued to paint an optimistic picture of the domestic outlook, even though the German manufacturing PMI faltered somewhat on Wednesday morning.
While Angela Merkel’s CDU and the SPD proceeded to the next stage of formal coalition negotiations, the risk of talks falling through remains, limiting the upside potential of EUR exchange rates.
If there are any signs that a new German coalition will not materialise the Euro is likely to weaken, with investors unimpressed by the prospect of fresh elections.
However, the EUR/USD exchange rate could also come under pressure if tomorrow’s European Central Bank (ECB) policy decision yields evidence of greater policymaker dovishness.