US Dollar Exchange Rates Muted Despite Hopes for Greater Fed Hawkishness

GBP/EUR – Brexit Impact Report Dents Sterling Outlook

A leaked cabinet report highlighting the likely impact of three different Brexit scenarios dented GBP exchange rates, with the document indicating the UK economy will see slower growth even if a deal is struck.

Coupled with fresh rumblings in the Conservative Party regarding Theresa May’s leadership, this has diminished the appeal of the Pound, offering a reminder of the level of uncertainty that still hangs over the UK economic outlook.

Brexit-based jitters kept Sterling under a degree of pressure throughout the early part of the week, especially as the UK and EU look to be at odds once again over the details of the proposed transition agreement.

Unless there are signs of increased unity within the British government political concerns are likely to remain a drag on GBP exchange rates, regardless of domestic data.

GBP/USD – Carney Comments Boost BoE Rate Hike Odds

Comments yesterday from Bank of England (BoE) Governor Mark Carney helped to improve the appeal of the Pound, fuelling market hopes that the central bank could raise interest rates again in the near future.

Carney stated that the BoE is turning its focus back towards the task of bringing down inflation, something that encouraged investors to pile back into Sterling.

Nevertheless, a rise in net consumer credit data somewhat undermined the likelihood of an imminent rate hike, highlighting the fragile position of UK households.

Further support for the Pound could be found following the release of some positive UK PMIs for January, with investors keen to gauge whether the economy started 2018 on a stronger footing than the year before.

USD/GBP – US Dollar Softens Ahead of Fed Meeting

Confidence in the US Dollar has remained rather volatile, with markets still very much concerned by the Trump administration’s approach to trade.

Even so, as the latest personal consumption expenditure core figure matched forecasts this boosted bets that the Federal Reserve will opt to take a more hawkish policy stance in the coming months.

Although no change in interest rates is forecast at this juncture, this has bolstered expectations ahead of the January Federal Open Market Committee (FOMC) policy meeting.

Should Fed policymakers show signs of favouring a faster pace of rate hikes, USD exchange rates are likely to recover greater ground.

Friday’s non-farm payrolls report could also offer the US Dollar a rallying point, providing the labour market continues to tighten.

EUR/USD – Strong Eurozone Growth Supports Single Currency

The Euro remained on a generally strong footing this week thanks to the positive nature of the fourth quarter Eurozone gross domestic product data.

Both France and Spain showed robust growth in their individual figures, with business investment in particular picking up to multi-year highs.

This built on the less dovish tone of recent European Central Bank (ECB) commentary, as the strength of the Eurozone economy gives policymakers greater incentive to wind down the long-running quantitative easing program.

However, disappointing German inflation data has limited the bullishness of the EUR/USD exchange rate, undermining the odds of any imminent ECB action.

January’s finalised raft of Eurozone PMIs is unlikely to have any significant impact on the Euro in the coming days, with little change expected from the provisional readings.

Adam Solomon

Adam joined the team at TorFX soon after graduating from University in 2005 with a degree in Journalism. Since then Adam has advanced to become both Head of Trading and Head of Treasury. His keen interest in the currency market and knowledge of what drives exchange rates makes him perfectly positioned to produce regular market updates focused on the movements of the major currencies.

Contact Adam Solomon