Currencies Bulletin: Pound Euro (GBP/EUR) Exchange Rate Recovers After Theresa May Sees Off Confidence Vote

GBP/EUR – Pound Benefits as Theresa May Survives No Confidence Vote

As rebel Conservative MPs failed to oust Theresa May in a vote of no-confidence on Wednesday evening the mood towards the Pound improved once again.

While support for May was not as strong as it could have been this victory still encouraged a greater sense of political stability, with Conservatives now unable to challenge May’s leadership again for twelve months.

However, the gains of the GBP/EUR exchange rate were still somewhat muted thanks to the high degree of uncertainty that still surrounds Brexit.

With EU leaders unlikely to offer May the assurances on the Irish backstop that Brexiteers demand support for the proposal Withdrawal Agreement looks set to remain limited.

Thus, unless there is a breakthrough on Brexit the Pound may struggle to hold onto a stronger footing in the days ahead.

GBP/USD – Stronger Wage Growth Offers Limited Support to Pound

While UK average weekly earnings surprised to the upside, showing growth of 3.3% in the three months to October, this failed to significantly boost the Pound.

Even with wage growth picking up the chances of the Bank of England (BoE) raising interest rates again in the near future still look slim.

Tuesday’s UK consumer price index data may put further pressure on BoE policymakers, however, as forecasts point towards a fresh uptick on the year.

If the headline inflation rate fails to move back towards the BoE’s 2% target this could give the BoE greater incentive to hike interest rates sooner rather than later.

USD/GBP – Weaker US Inflation Dents Odds of 2019 Fed Interest Rate Hike

The odds of the Federal Reserve continuing to tighten monetary policy in 2019 have deteriorated further this week on the back of weaker consumer price index data.

As the inflation rate eased from 2.5% to 2.2% on the year this gave policymakers fresh incentive to leave interest rates on hold for longer, suggesting that inflation remains under control.

With market risk appetite picking up in response to the latest signs of easing trade tensions between the US and China support for the US Dollar proved limited this week.

Further losses could be in store for USD exchange rates on Friday if November’s advance retail sales data proves as weak as forecast.

If sales growth eases from 0.8% to just 0.1% on the month this would point towards weakening consumer confidence and softer economic growth, to the detriment of the US Dollar.

EUR/USD – End of ECB Quantitative Easing Programme Fails to Boost Euro

While the European Central Bank (ECB) followed through with plans to end its quantitative easing programme at its December policy meeting this failed to shore up the Euro.

As the move was already largely priced into EUR exchange rates the impact of the decision was ultimately limited.

However, the single currency came under pressure in the wake of the meeting as President Mario Draghi sounded a slightly more cautious tone on the outlook of the Eurozone economy.

With the odds of a 2019 interest rate hike seeming to diminish the mood towards the Euro naturally soured.

December’s raft of Eurozone manufacturing and services PMIs could put fresh pressure on the Euro ahead of the weekend if growth momentum continues to ease.

Hannah Wilson

Contact Hannah Wilson