Pound US Dollar (GBP/USD) Exchange Rate Drops Sharply on Lower Inflation

GBP/EUR – Stronger UK Wage Growth Benefits Pound

Confidence in the Pound picked up on Tuesday after August’s average weekly earnings figures bettered forecasts.

As average earnings excluding bonuses accelerated 3.1% on the year this saw domestic wage growth rise to its highest level since January 2009.

However, a sharper-than-expected slowdown in September’s consumer price index soon saw GBP exchange rates return to a downtrend.

While weaker inflation bodes well for consumers it also decreases the odds of the Bank of England (BoE) will raise interest rates in the near future.

Unless September’s retail sales data paints an encouraging picture the Pound looks vulnerable to further losses this week.

GBP/USD – Rejection of EU Irish Border Proposals Prompts Brexit Impasse

Brexit negotiations hit a snag once again over the weekend as Theresa May rejected EU proposals to resolve the Irish border issue.

With talks at an impasse the mood towards the Pound naturally soured as the odds of a no-deal Brexit picked up.

This undermined earlier hopes that the two sides could reach some form of agreement in time for the October EU summit, removing support from GBP exchange rates.

Until markets see signs that the UK and EU can make progress on the border issue Pound Sterling may struggle to find any sustained support against its rivals.

USD/GBP – Weaker Inflation Limits US Dollar Upside

Investors were caught off guard as September’s US consumer price index fell short of forecast, easing from 2.7% to 2.3% on the year.

This disappointing slowdown diminished the case for the Federal Reserve to raise interest rates again imminently, dragging the US Dollar down.

Even so, while the latest advance retail sales and University of Michigan consumer sentiment index figures also proved lacklustre this was not enough to keep USD exchange rates under pressure for long.

Markets still consider the odds of a fourth 2018 interest rate hike high, with the US Dollar also gaining support from a wider sense of risk aversion.

If September’s Federal Open Market Committee (FOMC) meeting minutes prove hawkish in tone this is likely to keep USD exchange rates on a stronger footing.

EUR/USD – Euro Vulnerable to More Italian Budget Clashes

EUR exchange rates continued to experience volatility over the course of the last week as worries over the Italian government’s budget proposals persisted.

As Italian officials refused to back down over the controversial budget deficit target the stage looks set for the conflict with the European Commission to rumble on.

A sharp decline from -10.6 to -24.7 in the German ZEW economic sentiment survey for October put further pressure on the single currency, indicating a continued deterioration of confidence within the Eurozone’s powerhouse economy.

With Eurozone data thin on the ground ahead of the weekend the Euro is likely to remain under pressure from domestic politics, unless the budget dispute can be resolved amicably.

Hannah Wilson

Contact Hannah Wilson