Currencies Bulletin: Pound Euro Exchange Rate (GBP/EUR) Extends Gains as UK GDP Data Mixed

GBP/EUR Exchange Rate: Pound Shakes Off Mixed GDP Data

Investors were disappointed to find that the monthly UK gross domestic product had stagnated in August, limiting demand for the Pound on Wednesday morning.

However, the impact of this underwhelming figure was muted by the stronger rolling three-month GDP reading, which clocked in at 0.7%.

As the boost from strong summer consumer spending starts to fade, the UK economy could struggle to gain further momentum.

A softening of the RICS house price balance may give GBP exchange rates fresh cause for weakness this week, with continued signs of a domestic slowdown likely to dent demand for Pound Sterling.

GBP/USD – Odds of Imminent Brexit Deal Diminish

Comments from Theresa May’s spokesman undermined bets that the UK and EU are on track to secure a Brexit deal in the weeks ahead.

The less-than-optimistic comments prompted GBP exchange rates to come under fresh pressure, with the time remaining to agree a deal fast running out.

Ahead of next week’s key EU summit the mood towards the Pound could sour as market worries intensify.

As long as the threat of a no-deal Brexit continues to hang over the UK economy GBP exchange rates are unlikely to find significant headroom.

Even so, if the Bank of England’s (BoE) latest credit conditions and bank liabilities surveys adopt a more optimistic tone this could still offer the Pound a boost.

USD/GBP – US Dollar Benefits as Unemployment Hits 49-Year Low

In the wake of Friday’s unexpectedly sharp decline in the US unemployment rate the US Dollar continued to push higher across the board, benefitting as unemployment fell to a 49-year low.

Comments made by Dallas Fed President Robert Kaplan knocked some of the wind out of the US Dollar though as he indicated a preference for a more patient and measured pace of interest rate hikes.

Thursday’s US consumer price index data is likely to provoke some fresh volatility for USD exchange rates, even though this is not the Fed’s preferred measure of inflation.

An easing in the headline annual CPI could put the US Dollar under pressure, with markets unlikely to greet signs that US inflationary pressures are moderating.

EUR/USD – Tensions over Italian Budget Continue to Drag on Euro

Worries over the clash between the Italian government and the EU over the latter’s spending rules kept the Euro under pressure this week, even though the threat of an exit from the single currency has diminished.

With the two sides still at odds over the Italian government’s plan to target a deficit in excess of the EU’s mandated 2% limit investors continue to take a more cautious view of the Euro.

While the German trade surplus widened further than forecast in August this was not enough to boost EUR exchange rates, with export volumes continuing to contract.

Any weakening in August’s Eurozone industrial production figures could add to the bearish mood of the single currency, underlining the more muted nature of the growth outlook.

Tensions over Italy are also likely to weigh on EUR exchange rates, barring a political breakthrough.

Hannah Wilson

Contact Hannah Wilson