Currency Update: Pound Bounces Back vs Euro in Spite of Eurozone Inflation Uptick

GBP/EUR – Lack of Service Sector Contraction Offers Pound Support

The mood towards the Pound improved thanks to an unexpectedly solid upward revision of December’s finalised UK services PMI.

News that the sector had only stagnated in the final month of 2019, as opposed to contracting as initially thought, encouraged GBP exchange rates to recover some of their lost ground.

Even so, when coupled with the underwhelming manufacturing PMI this result still points towards a lacklustre fourth quarter economic performance for the UK.

As long as worries over the underlying resilience of the economy persist this could limit the potential for further GBP exchange rate gains, particularly as market focus turns back towards negotiations between the UK and EU.


GBP/USD – Pound Benefits from Strengthening House Prices

Confidence in the UK economy picked up on the back of December’s Halifax house price index, which saw prices accelerate 1.7% on the month.

This suggests that households regained some of their lost optimism in the wake of the general election result, encouraging hopes of a greater recovery in domestic activity.

A solid third quarter labour productivity index helped to bolster hopes of the UK continuing to weather the uncertainty surrounding the matter of Brexit.

Comments from Bank of England (BoE) Governor Mark Carney could provoke some fresh volatility for GBP exchange rates on Thursday, meanwhile.

Any indication that the BoE remains confident in the economy’s ability to recover its lost momentum in the coming months could see the Pound making fresh gains.


USD/GBP – US-Iran Tensions Fuel US Dollar Demand

A surprise decline in the ISM manufacturing index was not enough to keep the US Dollar on a weaker footing for long thanks to a surge in safe-haven demand.

After a US strike killed key Iranian general Qaseem Soleimani tensions between the two nations ratcheted higher, fuelling fears of a potential conflict in the Middle East.

This helped to push USD exchange rates up across the board, with these gains further cemented by an unexpectedly strong showing from the ISM non-manufacturing index.

Even so, the US Dollar could struggle to hold onto its bullish footing ahead of the weekend if December’s non-farm payrolls report fails to impress.

Any indication that the labour market is struggling to tighten or any softening of wage growth could weigh heavily on USD exchange rates.


EUR/USD – Euro Stalls in Spite of Rising Eurozone Inflation

Although December’s German and Eurozone consumer price indexes both picked up strongly on the year this failed to shore up demand for the Euro.

While Eurozone inflation rose to 1.3% this still falls some way short of the European Central Bank’s (ECB) 2% target, limiting the positive impact of the uptick.

Investors were also discouraged to find that German factory orders had unexpectedly slumped -1.3% on the month in November, highlighting persistent weakness within the manufacturing sector.

A similarly underwhelming showing from the corresponding German industrial production figure could see EUR exchange rates shedding further ground on Thursday.

With the German trade surplus also expected to narrow on the month this could cast further shadow over the outlook of the Eurozone’s powerhouse economy, dragging the Euro lower.


Louisa Heath

Contact Louisa Heath