Weekly Update: Rise in UK Inflation Supports Pound amid Vaccine Optimism

GBP/EUR – UK Inflation Uptick Boosts Pound

Support for the Pound picked up in the wake of October’s UK consumer price index report, with investors encouraged by a stronger-than-expected headline inflation rate.

As the inflation rate rose from 0.5% to 0.7% on the year, this fuelled bets that the Bank of England (BoE) may adopt a les dovish bias in the near future.

Stronger levels of inflation pressure would give policymakers less reason to consider cutting interest rates in negative territory, a prospect which helped to shore up GBP exchange rates.

However, with the deadline for a draft Brexit deal imminent, the Pound could come under renewed pressure in the days ahead if the two sides fail to reach an agreement.

 

GBP/USD – Pound Limited by Disappointing Monthly Growth

Confidence in the outlook of the UK economy was knocked last week thanks to September’s monthly GDP reading.

Investors were disappointed as the growth rate eased from 2.2% to 1.1% on the month, pointing towards a sustained loss of economic momentum.

This weaker showing limited the appeal of the Pound, especially as Brexit-based uncertainty and Covid-19 disruption look set to increasingly weigh on growth in the fourth quarter.

Any fresh deterioration in Friday’s GfK consumer confidence index may add to anxiety over the economic outlook, with weaker levels of sentiment likely to further drag on GDP in the final months of the year.

 

USD/GBP – Soft Inflation and Covid-19 Vaccine Drive Down US Dollar

As October’s US inflation rate weakened further than anticipated, the US Dollar came under pressure ahead of the weekend.

USD exchange rates also shed ground at the start of this week in response to news that the Moderna Covid-19 vaccine trials had delivered an effectiveness of nearly 95%.

Hopes that the global economy could return to normal sooner rather than later, despite surging coronavirus cases in the US, saw the safe-haven US Dollar fall sharply out of favour on Monday.

With forecasts pointing towards a slowdown in the latest Philadelphia manufacturing index, the mood towards the US Dollar could sour further on Thursday.

 

EUR/USD – Slower Eurozone Growth Weighs on Single Currency

A slight negative revision to the third quarter Eurozone GDP left the Euro on a weak footing last week but able to gain against a weak US Dollar due to its negative correlation.

With growth proving a little weaker than initially thought, this encouraged bets that the Eurozone could experience a sharper slowdown in the fourth quarter, delivering a double-dip recession.

As Friday’s flash Eurozone consumer confidence index looks set to fall deeper into negative territory, the Euro may struggle to find any renewed traction in the days ahead.

Unless the currency union can demonstrate evidence of resilience, the odds of greater European Central Bank (ECB) policy action are likely to mount, to the detriment of EUR exchange rates.

Louisa Heath

Contact Louisa Heath


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