GBP/EUR – Higher Government Borrowing Weighs on Pound
As UK public sector net borrowing picked up further than forecast in October this put a fresh dampener on the Pound, in spite of the year-on-year deficit narrowing.
This increase in government borrowing raised fresh concerns over the outlook of the UK economy and its resilience to Brexit developments.
The monthly increase could jeopardise Chancellor Philip Hammond’s Budget, which purported to usher in the end of the long-running programme of austerity.
With no fresh UK data set for release ahead of the weekend GBP exchange rates remain vulnerable to selling pressure, especially if political jitters pick up once again.
GBP/USD – Threat of Conservative Leadership Challenge Diminishes
The receding threat of a vote of no-confidence in Theresa May helped GBP exchange rates to recover some of last week’s losses.
Even so, as it remains to be seen whether the proposed Brexit deal will make its way through Parliament a sense of uncertainty continues to hang over the domestic outlook.
If MPs ultimately vote against the proposal this would sharply increase the odds of a no-deal Brexit, to the detriment of the Pound.
As long as markets see reason to bet on the prospect of the UK and EU maintaining a closer relationship after March 2019, though, this could help to limit the downside potential of GBP exchange rates.
USD/GBP – Retail Sales Uptick Encourages US Dollar Confidence
A better-than-expected rebound in October’s US retail sales data encouraged the US Dollar to make fresh gains against its rivals last week.
Subsequent commentary from Federal Reserve policymakers limited the gains of USD exchange rates, however, as the tone proved less hawkish than anticipated.
With the Fed looking set to take a more gradual approach to monetary tightening in 2019 the upside potential of the US Dollar diminished, even with full odds of a December interest rate hike still priced in.
Unless US data continues to print solidly in the days ahead demand for the Dollar may ease further, especially as the trade spat between the US and China looks set to continue dragging on the economy.
EUR/USD – Strong Eurozone Inflation Unable to Boost Euro
While the finalised October Eurozone consumer price index confirmed that the headline inflation rate strengthened to 2.2% on the year this was not enough to shore up the Euro.
Even though the main inflation rate remains above the European Central Bank’s (ECB) 2% target investors still see little chance of policymakers raising interest rates in the near future.
However, the mood towards the single currency showed some signs of improvement amid reports that the Italian government could alter its 2019 budget proposal further.
If the European Commission and Italian government can move towards a compromise over the budget issue this could encourage EUR exchange rates to push higher.
Any signs of weakness in Friday’s raft of Eurozone manufacturing and services PMIs may leave the Euro on a softer footing, though.