GBP/EUR – Surprise Inflation Uptick Puts Pressure on UK Wages
Investors were caught by surprise to find that the UK inflation rate had defied expectations of a decline and instead accelerated from 2.5% to 2.7% in August.
With inflation at a fresh six-month high the pressure on domestic wages is picking back up, likely eroding consumer spending power in the months to come.
As a result, the Pound saw limited gains on the back of the data, even though this may increase the chances of the Bank of England (BoE) raising interest rates.
If Thursday’s UK retail sales data shows a contraction on the month, as forecast, the mood towards the Pound could sour further.
GBP/USD – Uneventful BoE Meeting Offered Limited Sterling Support
Reaction to the BoE’s September policy meeting proved rather muted last week, with policymakers voting unanimously to leave interest rates on hold.
While markets still expect the central bank to sit tight for some months to come, investors were encouraged by the latest signs of progress towards a Brexit deal.
However, as key issues remain unresolved the threat of a no-deal Brexit continues to limit the upside potential of Sterling.
Friday’s UK public sector net borrowing data could provoke additional volatility for GBP exchange rates if government finances fail to improve on the month.
Fresh evidence of the economy’s vulnerability to any untick in tensions regarding international trade may well leave the Pound on a weaker footing against its rivals.
USD/GBP – US Dollar Unable to Capitalise on Latest Escalation in Trade Tensions
Although the Trump administration followed through with its threat to impose fresh tariffs on an additional $200bn worth of Chinese products the US Dollar struggled to benefit from this move.
After August’s US annual consumer price index fell short of forecast to ease from 2.9% to 2.7% demand for the US Dollar has proved more limited.
Even though the dip in the headline inflation rate is not expected to have any impact on the Federal Reserve’s September interest rate decision this slowdown still undermines the likelihood of future rate hikes.
A decline in the Philadelphia Fed business outlook index for September or August’s leading index reading could put additional pressure on USD exchange rates as confidence in the US economy eases.
EUR/USD – Lowered ECB Growth Forecasts Fail to Dent Euro
While the European Central Bank (ECB) lowered its 2018 and 2019 growth forecasts at its September policy meeting this failed to put any significant pressure on the Euro.
Investors instead focused on the confirmation that the ECB intends to halve the size of its asset purchases in October, keeping the central bank on track to wind down its quantitative easing programme by the end of the year.
However, confidence in the underlying health of the Eurozone economy remains limited thanks to the disappointing nature of recent trade data and rising global trade tensions.
Any signs of a slowdown in September’s raft of Eurozone manufacturing and services PMIs could leave EUR exchange rates on the back foot once again.