GBP/EUR Exchange Rate – Pound Rises against Euro as Eurozone Data Softens
The Pound was able to register steady gains versus the Euro over the course of the past seven days.
The outcome of the Italian general election weighed on the Euro to some extent, although the collapse of the centrist parties as voters threw their support behind Eurosceptic and far-right candidates was largely expected and priced-in.
A solid UK services PMI helped to rescue hopes that the UK economy managed to escape a first-quarter slowdown this year, although the overall outlook remains in question.
Meanwhile, the Eurozone struggled due to a general softening of data compared to previous releases, with the fourth-quarter consumption, January’s German factory orders and trade and production figures all disappointing forecasts.
Friday’s slew of UK industry data largely disappointed forecasts, but markets were still happy to see strengthening growth, although construction output did slump -3.4% month-on-month during January.
GBP/USD – Pound Remains Strong as Trade War Fears Weigh on US Dollar as Well
The Pound may have been unsettled last week by fears over the potential for US metal tariffs to spark a global trade war, but so was the US Dollar.
The step towards protectionism from the US comes at the worst time for the UK, with a strong UK-US free-trade deal seen as one of the essential criteria for the success of the domestic economy once Brexit has been completed.
Particularly concerning for markets was the news that President Donald Trump’s top economic advisor Gary Cohn had resigned following a disagreement over the new tariffs.
Cohn was a staunch advocate of free-trade, so his departure has worried markets, as it allows Trump to pursue a more protectionist agenda, with some economists forecasting that the tariffs on steel and aluminium imports will actually harm the US economy.
This allowed Sterling to largely hold onto its strength, although anticipation of last Friday’s non-farm payrolls report did force the Pound to shed a cent-and-a-half of the week’s earlier gains.
An entirely empty UK data calendar for the rest of the week is likely to leave the outlook for Brexit firmly in focus, which may see the Pound weaken.
USD/GBP – US Dollar Weakens as Markets Bet Jobs and Inflation Data Won’t Alter Interest Rate Outlook
The US Dollar seemed to have recovered its strength towards the end of last week, as the approach of US non-farm payrolls data pushed the USD/GBP exchange rate higher.
However, markets reacted negatively to the huge 313,000 increase in the workforce, which suggests there is still plenty of slack in the labour market, rather than it being almost at full capacity.
Wage growth was also slower than expected, further muting the outlook for inflationary pressures and therefore the need for more than the three interest rate hikes pencilled in for 2018.
The same thing happened again with yesterday’s inflation data, after it failed to show the kind of strong uptick markets expect will be necessary to improve the US monetary policy outlook.
Friday’s University of Michigan preliminary sentiment index for March is unlikely to provide much support for USD, given that the index is predicted to weaken from 99.7 to 99.3.
There is little data on the economic calendar next week, although this won’t matter much as markets will have their attention fixed on Wednesday evening’s monetary policy announcements from the Federal Reserve.
EUR/USD – Euro Recovers Losses against US Dollar after Mediocre US Inflation Data
The Euro seesawed against the US Dollar last week, with fears that the EU could be one of the main targets for President Donald Trump’s tariffs weighing on EUR.
EU officials quickly retaliated against Trump’s suggestions of metal tariffs with threats to place import duties on motorcycles, jeans and Bourbon whisky, but this just resulted in Trump suggesting a tariff on EU cars.
The approach of the European Central Bank (ECB) monetary policy meeting also weakened the Euro towards the weekend, with President Mario Draghi’s cautious comments over the impact of a trade war pushing the Euro lower.
However, the belief that Tuesday’s US inflation figures weren’t strong enough to change the Federal Open Market Committee’s (FOMC) mind regarding the monetary policy outlook saw the US Dollar give way to the Euro, which recovered most of the losses made during the latter half of the last week.
A speech tomorrow from ECB official Sabine Lautenschlaeger could cause some Euro volatility, as she is one of the more hawkish members of the Governing Council, and may suggest that the ECB needs to update its forward guidance regarding future policy changes.