Exchange Rates Roundup: Flash Crash Rocks Currency Markets, USD Undermined by Dovish Fed

GBP/EUR Exchange Rate: Brexit Vote to Drive Volatility in Sterling?

The Pound traded in a wide range last week, with the UK currency initially plummeting as markets re-opened after the New Year as Brexit stockpiling undermined confidence in the UK’s latest manufacturing PMI.

Exacerbating these losses was a mini flash-crash in currency markets overnight on Wednesday, as thin trade saw markets react violently to American tech giant Apple slashing its sales expectations amid a warning of adverse economic conditions in China.

This saw Sterling lose out against some of its more stable peers, such as the Euro, as investors sold off their riskier assets.

However it didn’t take markets long to correct themselves, with the GBP/EUR exchange rate rallying throughout the second half of the week and finally surging on the back of some lacklustre Eurozone inflation figures.

The start of this week has seen the Pound begin to give up ground again however, as Brexit uncertainty starts to dampen sentiment ahead of a House of Commons vote on Theresa May’s EU withdrawal deal.

The vote itself is currently scheduled for 15 January and could prompt some notable volatility in GBP exchange rates next week, especially if MPs vote to reject the deal.

GBP/USD Exchange Rate: Slight Rise in Services PMI Supports Rally in the Pound

The GBP/USD exchange rate was subject to some major swings last week, with the pairing briefly striking a 20-month low during Wednesday evening’s flash crash.

The Pound was able to recover the majority of these losses in the second half of the week however, partly in thanks to the UK services sector expanding at a faster pace than expected during December, as the sector edged slightly further away from the point of contraction.

However it’s unlikely that UK data will have much of an impact on the Pound going forward as Brexit will likely dominate Sterling sentiment over the next few months.

USD/GBP Exchange Rate: Dovish Fed Speech Undermines US Dollar Appeal

After struggling at the very end of 2018 due to the ongoing US government shutdown, the USD/GBP exchange rate roared high at the start of 2019 as safe-haven demand surged.

The initial catalyst for this was the publication of some weaker-than-expected Chinese manufacturing data, which spurred fears of a global slowdown.

This was quickly followed by Wednesday’s flash-crash which saw the US Dollar and Japanese Yen spike as investors flocked to safe-haven currencies.

However the US Dollar was unable to hold onto these gains in the second half of the week, with a sharp drop in growth in the US manufacturing sector dampening USD demand on Thursday.

These losses then accelerated on Friday as Federal Reserve Chair Jerome Powell hinted that the Fed may pause interest rate hikes in 2019 as he suggested the bank would remain ‘patient and sensitive’ to the downside risks facing the US economy.

Meanwhile this week has seen only limited movement in the GBP/USD exchange rate, with some positive progress in trade talks between the US and China capping demand for safe-haven currencies.

Looking ahead, the future upside potential for the US Dollar looks limited, with easing trade tensions, a more dovish Fed and a slowing economy all likely to dampen the appeal of USD.

EUR/USD Exchange Rate: Weak Eurozone Data Drags on the Euro

The Euro found itself on the defensive last week as a run of gloomy Eurozone data undermined the single currency.

The initial focus was on the bloc’s latest PMI figures, which confirmed that the Eurozone’s private sector expanded at its slowest pace in over four years in December.

However it was a sharper-than-expected drop in the Eurozone’s CPI figures that appeared to be the most damaging for EUR/USD Inflation plummeted from 1.9% to an eight-month low of 1.6% at the end of last year, dampening hopes of a rate hike from the European Central Bank (ECB) in 2019.

Given these fears, markets are likely to pay close attention to the minutes from the ECB’s December meeting when they are published later this week.

Luke Trevail

Luke studied Journalism at university but quickly moved into the financial sector, initially working in retail banking before joining TorFX in 2007. As a Senior Account Manager Luke assists in overseeing the management of the company’s exposure to currency volatility. He uses his years of foreign exchange experience to produce regular news updates exploring the latest currency movements.

Contact Luke Trevail