GBP/EUR – Signs of Easing UK Growth Weigh on GBP Exchange Rates
Although the UK services PMI saw some improvement on the month this was not enough to bolster confidence in the domestic outlook.
As signs still point towards the UK economy having continued to lose momentum at the start of the second quarter, the appeal of the Pound naturally diminished.
This disappointing prognosis prompted the odds of an imminent Bank of England (BoE) interest rate hike to plunge into single digits, as opposed to the 90% odds that investors had been pricing in previously.
If the NIESR gross domestic product estimate for the three months to April reflects similar weakness this could see GBP exchange rates extending their recent losses further this week.
GBP/USD – Pound Softness Forecast on Dovish BoE Meeting
A surprisingly sharp contraction in the BRC like-for-like retail sales figure offered GBP exchange rates little in the way of support, pointing towards the continued caution of consumers.
With consumer spending still weakening, confidence in the domestic outlook remains limited, given the significant role that demand has had in driving economic growth in the wake of the EU referendum.
Further weakness could be in store for GBP exchange rates on the back of the BoE’s May policy meeting.
If the Monetary Policy Committee (MPC) adopts a more cautious outlook with regard to raising interest rates this could leave the Pound vulnerable to further losses.
A downbeat quarterly Inflation Report may also weigh heavily on GBP exchange rates, especially if the BoE looks set to leave interest rates on hold for the foreseeable future.
USD/GBP – US Dollar Benefits from Falling Unemployment Rate
While US non-farm payrolls fell short of forecasts in April this failed to dent USD exchange rates, even as domestic wage growth eased.
Markets were encouraged by a surprisingly sharp decline in the unemployment rate, which fell from 4.1% to 3.9% in April to highlight the continued tightening of the US labour market.
This improvement lent weight to bets that the Federal Reserve will pursue a more aggressive pace of monetary tightening in the months ahead, to the benefit of the US Dollar.
An uptick from the latest US consumer price index would give the Fed an additional incentive to raise interest rates again sooner rather than later, with headline inflation forecast to rise to 2.5%.
However, if the consumer price index fails to strengthen as forecast, the US Dollar could come under renewed pressure.
EUR/USD – Weakening Eurozone Inflation Limits Euro Demand
April’s Eurozone consumer price index data showed unexpected weakness, with the headline annual rate easing from 1.3% to 1.2%.
The odds of the ECB adopting a more optimistic policy outlook were further undermined by the weakness of the finalised raft of Eurozone services and composite PMIs.
If the latest ECB economic bulletin adopts a more cautious tone this is likely to weigh heavily on EUR exchange rates ahead of the weekend.
Rising global geopolitical tensions could also limit the appeal of the Euro in the near term, especially if trade relations between the EU and the US sour further.