GBP/EUR Struggles to Hold onto Gains despite Barnier’s Brexit Comments
UPDATE: This afternoon, the Pound (GBP) is attempting to hold onto its gains against the Euro (EUR) after some analysts cast doubt on whether any UK/EU deal would be able to make it through Parliament.
After yesterday’s surge, Sterling began to look deflated by late-morning, and is currently trading around its opening levels with the Euro.
Pouring cold water on the sense of optimism, Neil Wilson, Chief Market Analyst from Markets.com, said:
‘Softer language [from the EU] will be a positive but A) There is yet scepticism about what it all means with few details on any of this; and B) We have heard this kind of language in the past.’
GBP/EUR Exchange Rate – Brexit Optimism Prompts Pound Surge after Comments from EU’s Michel Barnier
Comments from chief EU negotiator Michel Barnier prompted GBP exchange rates to rally sharply on Wednesday afternoon as hopes of a workable Brexit deal leapt higher.
As Barnier noted that the EU is ‘prepared to offer Britain a partnership such as there never has been with any other third country’ this gave the Pound a solid boost higher across the board.
Although key issues are still yet to see resolution and Barnier reiterated the EU’s red lines, this was still enough of a positive development to dent the odds of a no-deal Brexit scenario.
However, unless this more optimistic rhetoric is backed up with tangible progress the Pound (GBP) could ultimately struggle to hold onto these gains for long.
GBP/USD Exchange Rate – Pound Falters as UK Consumer Borrowing Weakens
An unexpectedly sharp decline in UK net consumer credit put Sterling (GBP) under pressure, meanwhile, as borrowing slowed to its lowest level since November 2015.
This weaker showing does not bode overly well for the economic outlook thanks to the significant role consumer spending has had in driving growth in the last two years.
If the GfK consumer confidence index for August also shows a decline this could give investors an incentive to sell out of the Pound once again.
Evidence that Brexit uncertainty is weighing on domestic growth looks likely to limit the potential for GBP exchange rate gains in the near future.
USD/GBP Exchange Rate – Surprise Signs of Fed Caution Dents US Dollar
Demand for the US Dollar (USD) faltered ahead of the weekend thanks to unexpectedly cautious commentary from Federal Reserve Chair Jerome Powell.
Markets were caught off guard by Powell’s indication that future interest rate hikes remain dependent on stronger domestic data, limiting the odds of two more hikes before the end of 2018.
Even so, the better-than-expected second quarter annualised US gross domestic product reading soon gave USD exchange rates fresh cause for confidence.
As long as US inflation continues to build and economic data impresses the downside potential of the US Dollar is likely to remain limited.
EUR/USD Exchange Rate – Improving ECB Outlook on Inflation Encourages Euro Gains
As the European Central Bank (ECB) meeting minutes for July indicated that worries over the Eurozone’s inflation outlook are easing this offered a fresh boost to the Euro.
However, EUR exchange rates struggled to sustain this positive mood for long thanks to mounting tensions between the Italian government and the EU.
As Italian spending plans put the country on a collision course with the EU’s budget rules the prospect of a fresh Eurozone crisis helped to drag the single currency down against its rivals over the course of the week.
Even so, if August’s Eurozone inflation rate continues to run above the ECB’s 2% target EUR exchange rates could find a fresh rallying point ahead of the weekend.