Pound Bounces Back from Lows as Inflation Defies Forecast

GBP/EUR – Unexpected Inflation Uptick Buoys Pound

An upside surprise from July’s UK consumer price index helped to lift the Pound against its rivals, with the headline inflation rate strengthening from 2.0% to 2.1%.

This defied forecasts of a slight easing in inflationary pressure and encouraged bets that the Bank of England (BoE) will refrain from cutting interest rates in the near future.

But while wage growth showed signs of picking up in June, household finances look set to remain under pressure in the third quarter.

If the latest UK retail sales figures point towards a decline in consumer spending on the month, GBP exchange rates could falter on Thursday.

Without stronger levels of spending the risk of third quarter economic contraction will remain, to the detriment of the Pound.

GBP/USD – Pound Stumbles After Surprise UK GDP Contraction

The second quarter UK gross domestic product reading put a dampener on the Pound last week.

As growth fell short of forecasts to deliver a -0.2% quarterly contraction confidence in the economic outlook naturally deteriorated.

This weakness also fuelled speculation that the UK economy could be heading for recession, with forecasts pointing towards a similarly weak third quarter.

Additionally, the likelihood of a no-deal Brexit scenario may keep GBP exchange rates biased to the downside in the weeks ahead.

USD/GBP – Rising Consumer Price Index Fails to Boost US Dollar

The US Dollar was unmoved by the news that July’s US consumer price index picked up from 1.6% to 1.8% on the year.

As the CPI is not the Federal Reserve’s preferred measure of inflation this improvement is unlikely to be enough to alter policymakers’ current outlook.

Support for the US Dollar may prove limited with confidence in the underlying health of the US economy still limited and global trade tensions easing.

The mood of USD exchange rates could sour further ahead of the weekend if advance retail sales and the University of Michigan consumer sentiment index point towards lower levels of domestic confidence.

EUR/USD – Decline in German Economic Confidence Weakens Euro

A sharp decline in August’s German ZEW economic sentiment index (from -24.5 to -44.1) left the Euro on a weaker footing.

This continued deterioration in German confidence fuelled worries over the outlook of the Eurozone’s powerhouse economy, even as US-China trade tensions showed signs of easing.

As German gross domestic product also contracted on the quarter as forecast the odds of an incoming recession increased, weighing down EUR exchange rates.

If the Eurozone trade surplus narrows sharply on the month this is likely to fuel a fresh bout of Euro selling.

Political developments in Italy could also prompt weakness for EUR exchange rates, with the coalition government suffering from a terminal decline.

Matthew Andrews

Contact Matthew Andrews