Soft Fed Outlook Drives Pound to US Dollar Exchange Rate to 2020 High, GBP/EUR Hits 11-Week Best

GBP/EUR Exchange Rate: Strengthening PMIs Offer Boost to Pound Euro Exchange rate

Confirmation that the UK manufacturing PMI saw another solid month of expansion in August offered a boost to Pound Exchange Rates this week.

With the manufacturing sector showing greater signs of resilience in the face of ongoing pandemic disruption, the GBP/EUR exchange rate found fresh support, especially as the wider sense of market sentiment turned positive.

A similarly strong showing from August’s finalised services PMI may encourage the Pound to Euro exchange rate to gain further ground against on Thursday.

As forecasts point towards the headline figure clocking in at the fastest pace of expansion in six years, confidence in the underlying health of the UK economy could improve and boost the Pound to Euro exchange rate.

However, the Pound’s gains could be limited as the UK’s furlough scheme comes to an end, with the threat of more redundancies potentially weighing on the GBP/EUR exchange rate.

As well as concern over the end of the furlough scheme, the Pound to Euro exchange rate is vulnerable to the ongoing deadlock in Brexit talks. Following informal talks earlier in the week, EU Chief Negotiator Michel Barnier expressed his disappointment on the UK’s unwillingness to compromise.

GBP/USD Exchange Rate: Fed’s Softer Inflation Outlook Drags Down US Dollar against the Pound

The Pound to US Dollar exchange rate rose to its best level of 2020 in the wake of Federal Reserve Chair Jerome Powell’s shift to a softer approach on inflation.

The safe-haven US Dollar exchange rates slumped across the board thanks to the likelihood of US interest rates remaining lower for longer, and the subsequent swing towards bullishness among investors.

The Pound’s gains against the US Dollar continued despite Bank of England (BoE) Governor Andrew Bailey’s dovish tone during his speech at the Jackson Hole symposium, claiming central banks are ‘not out of firepower’.

On top of this, Bailey’s testified to Parliament’s Treasury Committee on Wednesday commenting on possible economic scarring, huge uncertainty of structural changes and the need to solve unemployment.

Fresh commentary from other Fed policymakers could help to keep USD exchange rates under pressure in the days ahead, unless there are signs of hawkishness within the central bank.

However, another wave of market anxiety over the ultimate impact of the Covid-19 pandemic, and ongoing UK Brexit concerns may still see US Dollar exchange rates shored up by a renewed sense of risk aversion in the days ahead.


USD/GBP Exchange Rate: US Dollar to Pound Looks for Rally on Improved Unemployment Rate

A risk-on mood left the US Dollar to Pound exchange rate lacking in support as investors priced in the odds of the Fed keeping interest rates on hold for the foreseeable future.

Strong performances from the latest ISM and Markit manufacturing PMIs failed to shore up USD exchange rates, meanwhile, as investors remained sceptical of the longevity of the economic rebound.

A rally could be in store for the US Dollar ahead of the weekend, though, if August’s non-farm payrolls report can impress.

As the unemployment rate looks set to fall from 10.2% to 9.8% on the month markets could find renewed cause for confidence in the US outlook.

Signs that the decline of the labour market has bottomed out may drive the USD/GBP exchange rate away from its recent lows, regardless of lingering political worries.


EUR/USD Exchange Rate: Surprise Eurozone Deflation Weighs Heavily on Euro to Dollar

The Euro fell sharply out of favour earlier in the week as the Eurozone consumer price index unexpectedly slipped into negative territory in August.

This surprise fall into deflation stoked bets that the European Central Bank (ECB) could implement further monetary stimulus before the end of the year, leaving EUR/USD on the back foot.

With forecasts pointing towards a disappointing set of finalised Eurozone services PMIs, support for the Euro to US Dollar exchange rate may prove limited this week.

Looking ahead, EUR/USD may struggle to find any real positive momentum as long as the Eurozone economy shows evidence of struggling with the fallout of Covid-19 and rising cases.

A softer monthly increase in German factory orders in data released on Friday could equally put a dampener on the EUR/USD exchange rate as confidence in the health of the Eurozone’s powerhouse economy fades.

Next week could the the Euro to US Dollar exchange rate come under more pressure as the third quarter GDP estimate is expected to show another deep contraction. Added to this, the European Central Bank’s (ECB) rate decision will take on particular significance as a revision to inflation forecasts would weigh on Euro to US Dollar exchange rates.

Louisa Heath

Contact Louisa Heath