Weekly Currency Market Bulletin: Brexit Sentiment Drives GBP while Risk Sentiment Drives USD

GBP/EUR Exchange Rate: Hopes of Brexit Progress Lift the Pound

The Pound was given a leg up last week, with the GBP/EUR exchange rate climbing back above €1.17 as Brexit optimism was turbo-charged by media reports suggesting that Theresa May was willing to give in to Labour demands for an EU customs union in an effort to break the deadlock in cross-party talks.

This week has seen Sterling give up a significant portion of these gains however, as it quickly became clear that GBP investors may have jumped the gun, with Labour reporting that progress in talks with the government remained limited.

Looking ahead, the Pound may bounce back again by the end of the week as economists expect the UK’s GDP figures to show that domestic growth surged from 0.2% to 0.5% in the first quarter.

GBP/USD Exchange Rate: Markets Shrug off BoE Rate Warning

While GBP/USD enjoyed some notable gains on the back of improved Brexit sentiment last week, there was a notable fall during the mid-week.

This came in spite of the Bank of England’s latest policy statement, which indicated that interest rates were likely to rise sooner than currently priced in by markets.

The muted reaction in Sterling was at least partially down to the UK’s latest PMI figures, which revealed that, whilst returning to growth last Month, several sectors in the economy remained dangerously close to stagnation.

While economists are expecting a solid GDP release from the UK this week, the accompanying investment figures, which are expected to forecast that Brexit uncertainty will have resulted in business investment in the UK contracting for the fifth consecutive quarter, could potentially limit any upside in GBP/USD.

USD/GBP Exchange Rate: Soft US Wage Growth Dents US Dollar

The USD/GBP exchange rate initially stumbled during the first half of last week’s session, as speculation that the Federal Reserve might hint at a rate cut limited the appeal of the US Dollar.

However, the Fed dispelled these concerns by making it clear that it remained in ‘wait and see’ mode with regards to monetary policy, with rates expected to remain on hold for the foreseeable future.

However, the US Dollar was quickly placed on the defensive again at the end of the week, with USD/GBP slipping to a three-week low as a bumper US payroll reading was undermined by some weaker-than-expected wage growth figures.

This week so far has seen the US Dollar claw back its losses after renewed tensions in US-China trade talks saw investors flock back to the main safe-haven currency.

Looking ahead, the uptick in US Dollar strength may persist for the latter half of the week, with the latest US CPI figures expected to report that inflation bounced back in April.

EUR/USD Exchange Rate: Eurozone Data Fails to Light a Fire under the Euro

Trade in the Euro has been mixed over the past week, with the single currency struggling to make any gains against the US Dollar despite some solid Eurozone data.

This began with the release of the Eurozone’s GDP figures at the start of the week, which only provided limited gains for EUR/USD despite the bloc expanding at a far faster pace than recent PMIs would have indicated.

The second half of the week also saw the Euro struggle to find momentum, with a jump in headline and underlying inflation in the Eurozone failing to boost EUR exchange rates as analysts warned the rise would likely prove temporary.

So far this week we have seen the Euro trade narrowly against the US Dollar, thanks to some robust industrial data from Germany, but a lull in economic releases for the remainder of the week could limit the single currency’s ability to hold its ground.

Matthew Andrews

Contact Matthew Andrews