Pound Sterling US Dollar (GBP/USD) Exchange Rate Slumps Sharply on Underwhelming UK Inflation

GBP/EUR – Brexit Worries Limit Pound Sterling Demand

Speculation over Brexit prompted further volatility for GBP exchange rates last week as reports emerged suggesting that the UK could remain a part of the European customs union past 2021.

However, this was soon dismissed by Theresa May, leaving the Pound on a weaker footing as markets struggled to weigh up the likely outcome of Brexit negotiations.

As Irish Prime Minister Leo Varadkar warned of the lingering risk of the UK departing the EU without any exit deal in place this added to the bearish mood surrounding Pound Sterling.

The second estimate of the first quarter UK gross domestic product is unlikely to offer GBP exchange rates anything in the way of support on Friday.

With the economy under pressure from Brexit-based uncertainty the appeal of the Pound looks set to remain limited.

GBP/USD – Weaker-than-Forecast UK Inflation Dents BoE Rate Hike Odds

Pound exchange rates slumped sharply on Wednesday morning after the UK consumer price index fell short of forecast.

Disappointment greeted news that inflation had unexpectedly softened from 2.5% to 2.4% in April, leaving Pound Sterling on a generally weaker footing.

This softer showing undermined the case for an autumn BoE interest rate hike, something which markets had been betting on.

If commentary from BoE policymakers shifts to a more dovish tone in the coming days this is likely to keep GBP exchange rates on the back foot.

As forecasts point towards a dip in UK retail sales growth the Pound could struggle to find a rallying point in the near term.

USD/GBP – Hawkish Fed Minutes Forecast to Boost USD

The US Dollar lost some of its momentum ahead of the weekend as Federal Reserve policymakers failed to take quite as much of a hawkish outlook as investors had hoped to see.

Although the Chicago Fed national activity index showed a modest improvement on the month, this failed to shore up the US Dollar at the start of the week.

However, lingering worries over the prospect of a US-China trade war and a resurgence in market risk aversion helped to boost the US Dollar on Wednesday.

Reaction to tonight’s Federal Open Market Committee (FOMC) meeting minutes may offer support to USD exchange rates, provided policymakers adopt a more hawkish policy outlook.

EUR/USD – Italian Politics Drag on Euro Exchange Rates

Confirmation that the Eurozone consumer price index dipped from 1.3% to 1.2% on the year in April left the Euro on a weaker footing against its rivals last week.

Political developments in Italy put further downside pressure on EUR exchange rates, as markets were spooked by the prospect of a Eurosceptic alliance taking power in one of the Eurozone’s major economies.

While the Five Star Movement and League have backed away from their campaign pledges for an exit from the Euro, investors remain nervous of the prospect of a confrontation with the EU.

Signs of weakness in Friday’s German IFO business sentiment surveys could leave the Euro vulnerable to further losses.

Hannah Wilson

Contact Hannah Wilson