GBP/EUR – Jump in UK Inflation Fails to Shore up Pound
After jumping at the start of the week in response to the news that the UK’s budget will be delivered on 11 March, the Pound stabilised during the middle of the week, failing to react to the UK’s latest inflation figures.
January’s UK consumer price index data delivered a stronger acceleration than anticipated, jumping from 1.3% to 1.8% on the year.
However, while this pushes the headline inflation rate closer to the Bank of England’s (BoE) 2% target this failed to offer GBP exchange rates much in the way of encouragement.
A contraction in the monthly price index suggests that inflationary pressure within the economy remains fragile, keeping the possibility of a BoE interest rate cut on the table.
The Pound may find a rallying point ahead of the weekend, though, if the flash UK services PMI shows another solid month of growth in February.
As long as the UK service sector demonstrates resilience fears of a first quarter slowdown are likely to ease, to the benefit of GBP exchange rates.
GBP/USD – Strong UK House Price Growth Limits Pound Downside
Growing anxiety over the outlook of the UK economy temporarily eased in response to a surprise surge in January’s RICS house price balance.
As prices saw growth of 17% on the month this encouraged bets that households took an increasingly optimistic view at the start of 2020, fuelling hopes of a wider economic recovery.
Even so, if Thursday’s UK retail sales data fails to show a solid monthly rebound in consumer spending the appeal of the Pound could weaken further.
With the upcoming UK-EU trade talks looking increasingly fraught the risk of a fresh bout of Brexit-based anxiety weighing on the economy may drag GBP exchange rates down.
USD/GBP – Deteriorating US Production Weighs on US Dollar
As US industrial and manufacturing production continued their decline in January support for the US Dollar faltered ahead of the weekend.
With market risk appetite generally improving amid hopes that the Covid-19 outbreak has started to stabilise there was little reason for investors to buy into the safe-haven currency last week.
The release of the Federal Open Market Committee’s (FOMC) January meeting minutes could see USD exchange rates come under further pressure.
Increased signs of caution among Fed policymakers may increase bets on the possibility of interest rates seeing a fresh cut in the months ahead, denting the appeal of the US Dollar.
Unless the central bank reaffirms a willingness to leave interest rates on hold in the near future USD exchange rates look set to trend lower on the back of the minutes.
EUR/USD – German Growth Stagnation Limits Euro Appeal
While the fourth quarter German gross domestic product defied fears of a quarterly contraction the data still offered investors little particular cause for confidence.
As the Eurozone’s powerhouse economy saw a fresh quarter of stagnation at the end of 2019 this did not paint an encouraging picture, given the still unfolding impact of the Covid-19 outbreak.
With Germany, France and Italy also show signs of weakness markets remain wary of the potential for the currency union to underperform in the months ahead, leaving the Euro biased to the downside.
Further losses could be in store for EUR exchange rates this week if February’s flash manufacturing and services PMIs fail to demonstrate an improvement, particularly if the German manufacturing sector sinks deeper into contraction.