GBP/EUR – Pound Benefits from Efforts to Avert No-Deal Brexit
As Labour MPs tabled a cross-party motion aimed at averting a no-deal Brexit the mood towards the pound improved.
Although a sense of uncertainty continues to dominate the UK outlook, given the crowded nature of the ongoing Conservative leadership contest, GBP exchange rates still managed to recover some ground.
However, as long as the odds of the UK leaving the EU without a deal in October fail to ease substantially any Pound Sterling support could prove short-lived.
Comments from Bank of England (BoE) Governor Mark Carney may offer GBP exchange rates a boost ahead of the weekend, though, if he maintains a more optimistic outlook on monetary policy.
GBP/USD – Monthly UK GDP Contraction Dents Pound Demand
April’s UK gross domestic product data dealt a sharp blow to the Pound at the start of the week as growth saw a -0.4% contraction on the month.
This disappointing reading provoked fresh anxiety over the outlook of the UK economy, suggesting that a weaker second quarter could be in store as Brexit-based uncertainty persists.
Even so, as the unemployment rate held steady at a 44-year low of 3.8% in the three months to April this prompted a rapid rally in GBP exchange rates.
Worries over the underlying health of the UK economy may flare up further on Thursday, however, as forecasts point towards another weak RICS house price balance.
Evidence that the UK housing market continued to deteriorate in May could encourage investors to sell out of the Pound once again.
USD/GBP – Weaker Wage Growth Fuels Fed Rate Cut Odds
The underwhelming nature of May’s US non-farm payrolls report limited the appeal of the US Dollar on Friday as the labour market showed signs of loosening.
Investors were particularly discouraged by a surprise easing in wage growth on the year, something which may give the Federal Reserve greater incentive to cut interest rates in the near future.
However, with an imminent interest rate cut effectively priced into the US Dollar the potential for further losses soon proved limited.
Any easing in May’s US consumer price index could add to the likelihood of the Fed adopting an increasingly dovish outlook, leaving USD exchange rates exposed to downside pressure.
A rebound in the latest advance retail sales data may encourage greater demand for the US Dollar, though, especially if market risk aversion picks up.
EUR/USD – Dovish ECB Outlook Weighs on Euro
After the European Central Bank (ECB) affirmed its shift towards dovishness last week the mood towards the Euro has remained muted.
Another sharp month of decline in German industrial production added to the bearishness of EUR exchange rates, particularly in the face of a fresh escalation in global trade tensions.
An unexpectedly negative Eurozone Sentix investor confidence index saw demand for the single currency diminish further as concerns over the economic outlook mounted.
If Eurozone industrial production also shows a slowdown on the month in April worries over the prospect of a weaker second quarter gross domestic product are likely to pick up.
Any fresh signs of softness from the Italian economy could also weigh heavily on the Euro in the days ahead.