Weekly Currency Market Update: Pound under Pressure as UK GDP and Inflation Disappoint

GBP/EUR – Pound Softens as UK Inflation Falls Short of Forecast

Confidence in the Pound deteriorated on the back of January’s UK consumer price index data, which disappointed market expectations.

While forecasts had pointed towards inflationary pressure easing from 2.1% to 2.0% on the year the index ultimately slowed to just 1.8%.

With inflation now below the Bank of England’s (BoE) 2% target the case for a 2019 interest rate hike has diminished further, to the detriment of GBP exchange rates.

Although falling inflation boosts household finances, potentially fuelling further spending, this was not enough to prevent the Pound trending lower.

A solid rebound in Friday’s UK retail sales data, however, could offer GBP exchange rates a rallying point if consumers show signs of shaking off Brexit-based uncertainty.

GBP/USD – Weak UK Growth Data Weighs on Pound

The Pound started the week on a weaker footing as UK gross domestic product data fell short of forecast, highlighting a continued loss of economic momentum.

December’s monthly growth reading proved particularly discouraging as growth unexpectedly contracted -0.4%, contrary to forecasts of a stagnant reading.

This raised concerns that the UK economy could slow further in the first quarter of 2019, given the persistent uncertainty surrounding Brexit and the shape of the UK’s future relationship with the EU.

Unless there are signs of progress towards an agreement on the Irish border issue this is likely to keep the Pound on a weaker footing in the coming weeks.

USD/GBP – Fed Dovishness Limits US Dollar Upside

Signs of increasing dovishness among Federal Reserve policymakers weighed on the US Dollar, with monetary policy looking set to remain on hold for longer.

Even so, as officials moved to prevent a second government shutdown the appeal of the US Dollar soon picked up once again.

Confidence in the underlying health of the US economy remains limited, however, as domestic data continues to show signs of weakness.

A narrowing of the deficit in December’s monthly budget statement may not be enough to keep USD exchange rates on an uptrend, though, thanks to increasing worries over falling US export volumes.

The latest advance retail sales data could also weigh on the US Dollar if consumer spending shows fresh signs of slowing.

EUR/USD – Eurozone Industrial Production Slump Dents Euro

As French and Italian industrial production continued to contract this limited the appeal of the Euro on Friday, with confidence in the outlook of the Eurozone economy deteriorating.

This was followed by an unexpectedly sharp decline in December’s Eurozone industrial production figures, which saw output plunge -4.2% on the year.

Altogether this paints a discouraging picture of the economic outlook, raising fears that the Eurozone could face a potential recession as it continues to lose its previous momentum.

The mood towards the single currency could sour further if Thursday’s German gross domestic product data shows another quarter of contraction in the final three months of 2018.

Louisa Heath

Contact Louisa Heath