Weekly Currency Bulletin: Pound Euro Exchange Rate Pushes Higher despite UK Business Pessimism

GBP/EUR – UK Business Optimism Falls Further

January’s CBI business optimism index highlighted the persistent negative impact of Brexit-based uncertainty, with the index disappointing forecasts to fall from -16 to -23.

With businesses still lacking clarity over the future shape of the UK’s relationship with the EU there appears little cause for optimism at this stage.

Even so, the Pound was able to hold onto a stronger footing on Wednesday morning thanks to the relative weakness of both the Euro and the US Dollar.

Another weak showing from the corresponding CBI reported retail sales index, however, could see GBP exchange rates return to a downtrend ahead of the weekend.

GBP/USD – Pound Takes Little Encouragement from Brexit ‘Plan B’

Market reaction to Theresa May’s Brexit ‘Plan B’ proved rather lacklustre, with the new proposal hinging on reopening discussions on the controversial Irish backstop.

As progress towards a final Brexit deal remains elusive this limited the potential for Pound gains, even though investors see lower odds of a no-deal Brexit.

So long as the parliamentary deadlock over Brexit persists GBP exchange rates may struggle to find sustained support in the days ahead.

If the prospect of an extension to the March deadline appears more likely, though, the mood towards the Pound could take a bullish turn.

USD/GBP – Weakening Consumer Sentiment Limits US Dollar Appeal

An unexpectedly sharp decline in the University of Michigan consumer sentiment index dented the appeal of the US Dollar, pointing towards a greater sense of unease within the US economy.

The ongoing partial government shutdown continued to cast a shadow over USD exchange rates, meanwhile, as the disruption puts further pressure on struggling households.

However, as the IMF lowered its global growth forecast for 2019 this helped to limit the downside potential of the US Dollar as safe-haven demand picked up.

Even so, if the latest jobless claims figures indicate a loosening of the domestic labour market this could see USD exchange rates losing ground once again.

EUR/USD – Improved German Economic Sentiment Fails to Boost Euro

A modest improvement in the German ZEW economic sentiment index for January was not enough to shore up EUR exchange rates this week.

While the index bettered expectations it remains firmly within negative territory at -15, indicating a persistent sense of unease over the outlook of the Eurozone’s powerhouse economy.

The mood towards the Euro could sour further if Thursday’s European Central Bank (ECB) policy announcement leans towards dovishness.

Signs that policymakers are likely to leave interest rates on hold for the foreseeable future would limit the appeal of the single currency, especially with economic growth looking set to ease further in 2019.

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