US Dollar Returns to Downtrend after 2019 Budget Fails to Impress

GBP/EUR Exchange Rate – Lingering Brexit Anxiety Limits Pound Appeal

Although the Bank of England (BoE) proved more hawkish in outlook in its latest quarterly Inflation Report and February meeting minutes, this failed to keep the Pound on a stronger footing for long.

Even though the odds of a May interest rate hike picked up sharply last Thursday, the mood towards Sterling soon soured.

Comments from chief EU negotiator Michel Barnier prompted GBP exchange rates to slump sharply ahead of the weekend, as he noted that a transition deal is still not a certainty.

A persistent lack of clarity over the UK government’s approach to the issue is likely to remain a significant headwind for the Pound for some time to come.

GBP/USD – Steady Inflation Boosts BoE Rate Hike Speculation

Confidence in the Pound picked up somewhat on the back of Tuesday’s stronger-than-expected UK consumer price index.

As the headline January inflation rate held steady at 3.0% on the year, this encouraged bets that the BoE will move to raise interest rates sooner rather than later.

Even so, with the long-running wage squeeze continuing to put pressure on household finances this stronger showing does not necessarily bode well for the health of the wider UK economy.

If Friday’s retail sales data reveals consumer spending picked up further in January, though, this could see the GBP/USD exchange rate gaining fresh ground ahead of the weekend.

USD/GBP – Prospect of 1 Trillion Dollar Deficit Weighs Heavily on USD

Reaction to the Trump administration’s budget proposal for the 2019 fiscal year was generally negative, leaving USD exchange rates to trend lower across the board.

As the plan would result in the deficit reaching 1 trillion, and remaining at a similar level for some years to come, this naturally spooked investors, who piled out of the US Dollar in response.

Tonight’s release of US consumer price index data is set to be a catalyst for fresh USD exchange rate volatility, whether the figures present a positive surprise or not.

While this is not the Federal Reserve’s preferred measure of inflationary pressure a strong showing here could still boost bets on the prospect of an imminent interest rate hike, to the benefit of the US Dollar.

EUR/USD – Solid Eurozone GDP Points towards Stronger Domestic Outlook

The fourth quarter German and Eurozone gross domestic product data confirmed that the currency union ended 2017 on a generally stronger footing.

Markets remain hopeful that at least some of this robust momentum will have carried forward into 2018, encouraging bets that the Eurozone will see another year of solid growth.

Even so, given the dovish nature of recent comments from the European Central Bank (ECB) this is not likely to be enough to prompt any significant shift in policy outlook, limiting the positive impact on EUR exchange rates.

However, if the latest German wholesale price index figures point towards an uptick in inflationary pressure within the Eurozone’s powerhouse economy this could offer the Euro a greater degree of encouragement.

Hannah Wilson

Contact Hannah Wilson