GBP/EUR – Surprise Service Sector Contraction Adds to Pound Weakness
March’s UK services PMI caught markets off guard as the sector unexpectedly fell into a state of contraction, with the index slumping from 51.3 to 48.9 in the last month.
As the service sector remains the primary growth engine of the UK economy this slowdown raises the risk of a weak first quarter gross domestic product reading.
This naturally left Pound Sterling on a weaker footing against its rivals as confidence in the underlying health of the domestic economy deteriorated.
With Brexit jitters casting a long shadow over the UK economy and weighing heavily on business confidence investors see little chance of the sector rebounding as long as this state of uncertainty persists.
Unless Friday’s Halifax house price index delivers a significant positive surprise the appeal of the Pound looks set to remain muted in the days ahead.
GBP/USD – Lack of Brexit Progress Drives Pound Losses
The ongoing parliamentary deadlock over Brexit also limited the appeal of the Pound after MPs once again rejected proposed alternatives to Theresa May’s deal.
With the odds of a no-deal Brexit continuing to rise daily investors saw little incentive to favour the Pound over its rivals.
Although the risk of a fresh general election appears to have eased this was not enough to reassure markets, as a sense of political instability lingers.
Without signs that officials are moving towards a mutually agreeable resolution to the Brexit situation GBP exchange rates are likely to remain biased to the downside for the foreseeable future.
USD/GBP – US Dollar Falters as Global Trade Tensions Ease
An unexpected decline in the US personal consumption expenditure core reading saw the US Dollar weaken ahead of the weekend.
As the PCE remains the Federal Reserve’s preferred measure of inflation this easing increased the likelihood of interest rates remaining on hold throughout the remainder of 2019.
Reports of solid progress on the US-China trade agreement also put pressure on USD exchange rates this week, even as the US manufacturing sector showed signs of resilience.
Friday’s non-farm payrolls report could see the US Dollar return to a stronger footing, however, as forecasts point towards a solid improvement on the previous month’s weak employment gains.
If the labour market shows fresh evidence of tightening this is likely to shore up USD exchange rates once again.
EUR/USD – Weakening Eurozone Inflation Dents Euro Demand
The mood towards the Euro soured as March’s Eurozone consumer price index data fell short of forecast, easing from 1.5% to 1.4% on the year.
With inflation showing fresh signs of faltering the European Central Bank (ECB) looks set to maintain its current dovish bias for longer, further diminishing the odds of interest rates rising from their record lows.
Fresh signs of weakness within the Eurozone economy also weighed on EUR exchange rates, with the manufacturing sector continuing to struggle even as the service sector picked up.
However, the Euro is likely to come under fresh pressure on Thursday with the release of the ECB’s March meeting minutes.
Confirmation of the central bank’s dovish policy outlook would leave the single currency on a weaker footing, especially if the latest German industrial production data also shows signs of softness.