Brexit Worries Weigh on Pound Exchange Rates Ahead of BoE Decision

GBP/EUR Exchange Rate – Pound Remains Under Pressure on Brexit Outlook

News that the UK government has ‘categorically’ ruled out remaining within the EU customs union after Brexit has severely dented the Pound.

Markets were not impressed by this latest demonstration of hard Brexit rhetoric, especially as the likely ultimate shape of the UK’s future relationship with the EU still lacks any particular clarity.

With an exit from the customs union forecast to have a significant negative impact on the manufacturing sector investors have seen little cause for confidence in the Pound this week.

Unless the government can deliver a unified position on Brexit the appeal of Sterling looks set to remain limited for some time to come, especially if signs point towards a more severe break with the EU.

GBP/USD – Sterling Rally Possible on Hawkish BoE Meeting

January’s raft of UK PMIs all fell short of forecasts, suggesting that the economy lost some of its momentum at the start of 2018.

Coupled with underwhelming housing market data this left the Pound with little in the way of support, particularly as markets brace for the latest Bank of England (BoE) rate decision.

There are hopes that the BoE may signal an intent to raise interest rates again in the coming months, something which could drive GBP exchange rates higher.

However, if the accompanying quarterly inflation report highlights persistent worries over the outlook of the domestic economy this could temper any Sterling bullishness.

USD/GBP – Accelerating Wage Growth Boosts Fed Interest Rate Hike Bets

Friday’s unexpectedly strong uptick in average hourly earnings prompted the US Dollar to make strong gains across the board, fuelled by hopes of more aggressive Federal Reserve tightening.

As weak wage growth has been a concern of the Fed for some time this improvement was seen to pave to way to a faster pace of interest rate hikes over the coming year, in spite of lingering concerns over the economic outlook.

With the general sense of market risk appetite on the decline, USD exchange rates remained in upbeat form, in spite of some disappointment in the form of a widening of December’s trade deficit.

In the next few days the US Dollar could see further gains if Fed policymakers opt for a more optimistic message, although its upside potential looks somewhat exhausted at this juncture.

EUR/USD – German Coalition Breakthrough Supports Euro Exchange Rates

News that Angela Merkel’s CDU/CSU and the SPD have come to a deal to form a new coalition government offered a boost to the Euro on Wednesday, although the plan still requires approval from SPD members.

With an increased sense of political stability returning to the Eurozone’s powerhouse economy the downside potential of EUR exchange rates could be somewhat limited in the near term.

Even so, if the latest European Central Bank (ECB) Economic Bulletin proves more dovish in tone this could see the single currency weakening once again.

The latest commentary from ECB policymakers will also be in focus ahead of the weekend, with markets still hoping to see signs of a greater shift towards monetary tightening.

Laura Parsons

Laura has been working in the financial services sector since 2012 and provides currency news updates for a number of online and print publications. Over the years she has produced exchange rate analysis for publishers like French Property News, The Express, The Telegraph and Forbes.

Contact Laura Parsons