Currency Market Weekly Roundup: Pound Shakes Off Manufacturing Weakness amid Brexit Optimism

GBP/EUR – Pound Benefits from Hopes of Brexit Breakthrough

While UK stockpiling activity remained near its record highs this failed to prevent April’s manufacturing PMI easing from 55.1 to 53.1.

However, this loss of momentum failed to knock GBP exchange rates off their bullish run on Wednesday morning as markets continued to bet on hopes of a potential Brexit breakthrough.

With the Labour and Conservative leaderships still engaged in reportedly ‘constructive’ talks the prospect of an emergent compromise encouraged investors to favour the Pound.

If talks fail to deliver any particular progress towards a resolution of the Brexit issue, though, this could see GBP exchange rates fall sharply.

As political uncertainty looks set to weigh on economic growth for the foreseeable future the upside potential of the Pound still appears limited.

GBP/USD – Service Sector Rebound to Shore up Pound

Confidence in the Pound could improve further ahead of the weekend if Friday’s services PMI shows a solid rebound on the month.

After the surprise fall into contraction seen in March markets are hoping to see the sector return to a state of growth, boosting the odds of a stronger second quarter gross domestic product.

If the service sector, the primary growth engine of the UK economy, fails to return to expansion territory, however, this could drive the Pound lower across the board.

Weakness could also be in store on the back of the Bank of England’s (BoE) May policy decision if policymakers show greater signs of caution.

Unless the BoE expresses confidence in the outlook of the UK economy GBP exchange rates may lose their recent gains.

USD/GBP – Gross Domestic Product Report Limits US Dollar Appeal

Even though the annualised first quarter US gross domestic product surpassed forecasts, clocking in at 3.2%, the mood towards the US Dollar still soured.

Investors were disappointed by the underlying details of the report, which suggest that the world’s largest economy is still losing momentum as global trade tensions persist.

As March’s personal consumption expenditure core reading showed a surprise dip, easing to 1.6%, this encouraged USD exchange rates to extend their downtrend this week.

With the Federal Reserve’s preferred measure of inflation showing signs of slowing the case for higher interest rates appears to have diminished.

Any evidence that the Fed is shifting towards a more cautious outlook at tonight’s Federal Open Market Committee (FOMC) policy announcement could see the US Dollar slump further.

EUR/USD – Surge in German Inflation Fails to Boost Euro

An unexpectedly strong surge in the German consumer price index data failed to boost the Euro this week, even as the headline inflation rate leapt to 2.0%.

Although this matched the European Central Bank’s (ECB) inflation target the mood towards the single currency remained generally muted.

Anxiety over the latest political turmoil in Spain, after Sunday’s election failed to deliver a parliamentary majority, overshadowed the inflation data and positive first quarter Eurozone gross domestic product.

Confirmation that the Eurozone economy remained under pressure in April from the finalised raft of manufacturing and services PMIs could add to the bearishness of the Euro.

However, another better-than-expected inflation reading from Friday’s Eurozone consumer price index data could still see EUR exchange rates trending higher ahead of the weekend.

Louisa Heath

Contact Louisa Heath