Pound Exchange Rates Weekly Bulletin: Hopes of BoE Optimism Limit Pound Downside

GBP/EUR – Weaker UK Inflation Fails to Dent Pound

The Pound held steady in the wake of May’s UK consumer price index data, even though the headline inflation rate fell back to 2.0% as forecast.

While inflation no longer exceeds the Bank of England’s (BoE) 2.0% target, reducing the case for an imminent interest rate hike, this was not enough to send GBP exchange rates into a slump.

Investors took some encouragement from the fact that average earnings continued to significantly outpace inflation in the last month, pointing towards stronger wage growth.

If this translates into a stronger showing from May’s UK retail sales data the mood towards the Pound could pick up further, limiting the impact of lingering market anxiety over Brexit.

GBP/USD – Political Anxiety Weighs on Pound

GBP exchange rates have taken little encouragement from developments in the Conservative leadership contest, with hard-line Brexiteer Boris Johnson still appearing on course to secure the most votes.

With the risk of a no-deal Brexit increasing the appeal of the Pound proved generally limited, given previous signs of the negative impact the ongoing uncertainty is having on the domestic economy.

Further losses may be in store for the GBP/USD exchange rate on Thursday if the BoE fails to adopt a hawkish bias in its latest meeting minutes.

Unless the BoE looks set to raise interest rates before the end of the year demand for the Pound is likely to ease ahead of the weekend.

USD/GBP – US Dollar Braces for Federal Reserve Policy Announcement

An unexpectedly sharp decline in the latest University of Michigan consumer sentiment index saw the US Dollar falter last week.

With Federal Reserve policymakers already taking a more dovish tone on the subject of interest rates this dip fuelled bets that rates could see a cut sooner rather than later.

If tonight’s Federal Open Market Committee (FOMC) sees policymakers telegraph an imminent interest rate cut USD exchange rates look set to trend lower across the board.

However, as markets have already priced in much of the impact of a rate cut any US Dollar losses could prove short-lived in nature, unless the Fed actually pulls the trigger on interest rates.

EUR/USD – Dovish Draghi Comments Drive Euro Down

Comments from European Central Bank (ECB) Governor Mario Draghi saw the Euro plunge sharply on Tuesday as the prospect of an interest rate cut returned to the table.

Draghi indicated that the ECB could loosen monetary policy in the months ahead if Eurozone inflation fails to show signs of approaching its target level.

The disappointing nature of May’s German producer price index data offered fresh evidence of weaker inflationary pressure within the Eurozone, leaving the Euro on the back foot.

Signs of improvement in June’s raft of Eurozone manufacturing and services PMIs could encourage investors to buy back into the single currency on Friday, though.

Louisa Heath

Contact Louisa Heath