Will UK Growth Forecasts Send the GBP/EUR and GBP/USD Exchange Rates to New Lows in 2018?

Rate Hike Odds Fall as BoE Lowers Growth Forecasts, Pound Sterling to Euro (GBP/EUR) Exchange Rate Falls

As the Bank of England (BoE) opted to lower its growth forecasts in the latest quarterly Inflation Report, investors piled out of Pound Sterling and sent the GBP/EUR exchange rate lower.

With the Bank now expecting to see annual growth of 1.4%, as opposed to the 1.8% forecast in February, confidence in the domestic outlook naturally diminished.

This gave markets fresh reason to doubt the prospect of the BoE raising interest rates in the coming months, with policymaker sentiment seeming to lean towards renewed dovishness.

Unless commentary from policymakers takes a more optimistic tone, improving the odds of a 2018 rate hike, the mood towards the Pound is likely to remain muted.

Worst Levels of 2018 for GBP/USD Exchange Rate as US Dollar Surges

The GBP/USD exchange rate remained close to its lowest levels of the year so far as demand for the Pound failed to pick up on the back of Tuesday’s raft of UK wage data, with growth in average weekly earnings including bonuses found to have eased from 2.8% to 2.6% in the first quarter.

Even though the labour market continued to demonstrate signs of tightness this was not enough to encourage any GBP exchange rate gains, particularly as first quarter productivity was revealed to have fallen.

With domestic data thin on the ground this left the Pound under pressure, especially in the face of continued uncertainty over Brexit.

Ahead of next week’s UK consumer price index data the Pound may struggle to find any significant traction against its rivals.

Any fresh dip in domestic inflation is likely to discourage investors, further undermining the case for the BoE to raise interest rates again sooner rather than later.

US Dollar (USD) Exchange Rates Storm Higher Despite Disappointing Inflation Data

April’s US consumer price index data proved rather disappointing, leaving US Dollar (USD) exchange rates on a weaker footing last week.

While the headline CPI strengthened as forecast this was contrasted by weaker-than-expected monthly and core readings.

All in all, this suggests that inflationary pressure within the world’s largest economy is not quite as robust as hoped, giving the Federal Reserve some cause for pause.

Even so, a surprise uptick in the Empire manufacturing index encouraged USD exchange rates to rally sharply on Tuesday as confidence in the underlying health of the economy improved.

Any signs of further tightening of the US labour market in the latest jobless claims figures could offer further support to the US Dollar in the near term.

Hawkish ECB Comments Boost Single Currency, EUR/USD Exchange Rate Bounces back from Worst Levels

Confidence in the Euro picked up sharply at the start of the week on the back of comments from European Central Bank (ECB) policymaker Francois Villeroy de Galhau, allowing EUR exchange rates to edge higher

Markets were surprised by the more hawkish nature of Villeroy’s comments, which suggested that the ECB remains on course to exit its quantitative easing programme in the coming months.

Even though the first quarter German gross domestic product disappointed expectations, halving from 0.6% to 0.3% on the quarter, this was not enough to weigh down EUR exchange rates for long.

However, as inflation continues to lag behind the ECB’s 2% target investors remain doubtful over the prospect of the central bank returning to a hawkish policy bias any time soon.

Any widening of the Eurozone trade surplus could help to shore up EUR exchange rates ahead of the weekend, though.

Luke Trevail

Luke studied Journalism at university but quickly moved into the financial sector, initially working in retail banking before joining TorFX in 2007. As a Senior Account Manager Luke assists in overseeing the management of the company’s exposure to currency volatility. He uses his years of foreign exchange experience to produce regular news updates exploring the latest currency movements.

Contact Luke Trevail