Exchange rates Weekly Roundup: Political Uncertainty Continues to Dominate Pound Outlook

GBP/EUR – Consumer Confidence Improvement Fails to Boost Pound Appeal

An uptick in the GfK consumer confidence index was not enough to shore up the Pound this week, even though the index strengthened from -13 to -10.

While consumer sentiment showed signs of improving the general outlook remains negative, given the prospect of many more months of Brexit-based uncertainty.

However, the mood towards the Pound could improve in the days ahead if May’s set of UK PMIs show signs of strength.

Evidence that the economy is recovering some of its lost momentum may help to shore up GBP exchange rates, suggesting that the impact of Brexit anxiety is still proving limited.

On the other hand, if the services PMI edges closer to contraction territory and the underlying reports point towards continued domestic weakness the appeal of the Pound may diminish sharply.

GBP/USD – Rising Odds of No-Deal Brexit Drag on Pound

After the Labour and Conservative Parties both saw a loss of support in the European Parliament elections the odds of a potential Brexit compromise appeared to diminish.

With a hard-line Brexiteer still appearing the most likely successor to Theresa May GBP exchange rates remained under pressure thanks to jitters over the increased prospect of a no-deal Brexit.

Political developments are likely to drive further Pound volatility in the coming week, with the Conservative leadership contest set to run until July.

As long as the risk of the UK leaving the EU without a deal persists the GBP/USD exchange rate could struggle to return to a positive footing.

USD/GBP – Deteriorating Global Trade Outlook Benefits US Dollar

As April’s advance goods trade balance bettered forecasts, showing a more limited widening of the deficit, this helped to limit any selling pressure on the US Dollar ahead of the weekend.

USD exchange rates continued to benefit from the general deterioration in market risk sentiment, with the Trump administration still sending belligerent signals on trade.

The shock announcement of a new tariff on Mexican imports gave the US Dollar a modest boost, given existing concerns over the resilience of the US economy in the face of ongoing trade tensions.

Declines in upcoming US factory orders and the ISM manufacturing index could also weaken the US Dollar as markets look for signs that the current attitude to trade is hampering domestic growth.

Any widening of April’s trade deficit may encourage USD exchange rates to slump, meanwhile.

EUR/USD – Weakening Italian Growth Dents Euro Confidence

Confidence in the strength of the Eurozone economy diminished further after the first quarter Italian gross domestic product was revised lower.

With the Italian government still at odds with the EU over its budget rules this weaker growth data weighed heavily on the single currency, even though the economy avoided a fresh contraction.

EUR exchange rates look set to lose further ground on Monday as forecasts point towards the Eurozone consumer price index falling back once again.

Signs that inflationary pressure within the currency union are failing to pick up would encourage bets that the European Central Bank (ECB) will maintain its current cautious stance for longer.

Speculation over the successor to ECB President Mario Draghi could provoke additional volatility for the Euro in the days ahead.

Louisa Heath

Contact Louisa Heath