Although the Pound (GBP) surged on the back of an unexpectedly split Bank of England (BoE) interest rate decision it struggled to maintain its bullish form going into the weekend.
While markets were encouraged by Kristin Forbes’ surprise vote for a 25bpt rate hike the general outlook of the BoE nevertheless remains dovish.
As Forbes will depart the Bank in June, and all other members of the Monetary Policy Committee (MPC) maintained a cautious view on monetary policy, the prospect of an actual rate hike is still distant.
Interest rates are likely to remain at their current record low for some time to come, as Sylwia Hubar, research analyst at Natixis, noted:
‘We expect the BoE to maintain neutral monetary policy stance throughout 2017 and possibly throughout the whole period of Brexit negotiations. Sharply rising UK inflation (likely to reach 2% in February) along with slowing pay increases (2.3% in the three months to January) will gradually cease real wage growth, eating into household purchasing power.’
If Tuesday’s consumer price index report shows the expected uptick in domestic inflation this could limit the appeal of the Pound.
Given that the BoE reiterated its willingness to look through some degree of post-referendum inflation, even a stronger showing here is unlikely to encourage policymakers to adopt a more hawkish outlook in the near term.
GBP exchange rates could also continue to experience downside pressure from political developments, with tensions rising over the prospect of another Scottish independence referendum and the imminent triggering of Article 50.
After the initial relief of far-right candidate Geert Wilders falling short in the Dutch election the Euro (EUR) soon returned to a weaker footing.
Eurozone construction output showed a shock contraction on the year in January, undermining confidence in the resilience of the economy.
A similarly disappointing trade balance figure also shored up the Pound Euro exchange rate ahead of the weekend.
If the polls continue to point towards centrist Emmanuel Macron defeating National Front leader Marine Le Pen in the French presidential election, though, the single currency could find further support.
While the Federal Reserve was a little less hawkish than anticipated at its March policy meeting the US Dollar nevertheless maintained a strong level of underlying support.
Signs from the US economy have proven generally positive, with a sharper-than-expected decline in continuing jobless claims adding to the evidence of a robust labour market.
This could bode well for March’s University of Michigan consumer confidence index, with investors anticipating an uptick from 96.3 to 97.
Further bullish US data is likely to limit the strength of the GBP USD exchange rate, although the upside potential of the ‘Greenback’ remains somewhat restricted thanks to the less aggressive outlook of the Fed.
Current GBP EUR USD Interbank Exchange Rates
At the time of writing, the Pound Euro exchange rate was trending higher at 1.14. Meanwhile, the Pound US Dollar exchange rate was trending narrowly in the region of 1.23.
