Pound Exchange Rates Slump as Draft EU Withdrawal Treaty Published

GBP/EUR – Unexpectedly Hawkish BoE Comments Boosted Pound Demand

Comments from Bank of England (BoE) Deputy Governor David Ramsden encouraged the Pound to pick up at the start of the week.

Markets were surprised to hear that Ramsden, who had voted against November’s interest rate hike, now sees the case for rates to rise ‘somewhat sooner rather than somewhat later’.

This shift towards hawkishness boosted the odds of the BoE raising interest rates again in May, sending the Pound higher across the board on Monday morning.

However, if Thursday’s net consumer credit figure points towards a weakening in domestic consumer confidence this could undermine the odds of an imminent rate hike.

While the Bank has expressed some concerns over high levels of consumer credit investors are still unlikely to greet the prospect of weaker spending.

GBP/USD – Sterling Slides in Response to Withdrawal Treaty Draft

Demand for the Pound slumped sharply once the first draft of the EU’s proposed withdrawal treaty was published, however.

While chief EU negotiator Michel Barnier commented that there were ‘no surprises’ within the draft this was not enough to reassure GBP exchange rates on Wednesday morning.

The threat of a hard Brexit, with the UK losing access to the customs union, remains a major headwind for the Pound at this juncture.

Unless Prime Minister Theresa May can adopt a more conciliatory and soft approach in her latest Brexit speech on Friday the appeal of Sterling looks set to be rather limited in the near term.

USD/GBP – Markets Greet Hawkish Message from New Fed Chair

New Federal Reserve Chair Jerome Powell encouraged the US Dollar to rally this week, with markets interpreting his first comments before Congress as being hawkish in nature.

As investors continue to price in the odds of the Fed raising interest rates as many as four times over the course of 2018 USD exchange rates have naturally benefitted.

This helped to diminish the negative impact of disappointing advance goods trade balance and durable goods orders figures, even if the underlying health of the US economy remains somewhat questionable.

However, if the latest personal consumption expenditure data disappoints this could put the US Dollar under fresh pressure, given that the figure is the Fed’s preferred measure of inflation.

EUR/USD – Disappointing German Inflation Weighs on Euro

Confidence in the Euro weakened at the start of the week as European Central Bank (ECB) President Mario Draghi maintained a fairly dovish tone on the subject of monetary policy.

With Draghi still noting that the Eurozone economy requires monetary stimulus in order to support further growth, the prospect of any imminent shift in the ECB’s outlook diminished.

February’s German consumer price index also fell short of forecasts on Tuesday, giving the central bank further cause for dovishness and keeping EUR exchange rates under pressure.

As markets brace for the outcome of the latest Italian election the mood towards the Euro could deteriorate further, with investors still wary of the potential for another political upset.

Hannah Wilson

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