The GBP EUR and GBP USD exchange rates have recovered today after positive UK trade data improved the outlook of the post-Brexit economy.
- GBP EUR, GBP USD exchange rates advance – UK trade deficits fall dramatically
- Euro (EUR) kept weak after Draghi comments – Outlook for Eurozone monetary policy remains loose
- US Dollar (USD) pinned by strong Fed hike bets – Traders already anticipating higher borrowing costs
- GBP EUR, GBP USD exchange rate forecast – US confidence index could provide some support for US Dollar
The Euro remains soft after yesterday’s European Central Bank (ECB) policy changes, while the US Dollar is kept in check by strong Federal Reserve rate hike bets.
Pound Exchange Rates Improve Following Sharp Reduction in Trade Deficits
The latest UK data has supported Pound gains after showing a vastly improved picture of UK trade. October’s visible trade balance was expected to narrow from -£13.8 billion to -£11.8 billion, but instead dropped to -£9.7 billion. The non-EU trade balance shrank from -£5.2 billion to -£1.6 billion – nearly two billion more than expected – while the total trade balance printed at just under -£2 billion instead of at -£4.3 billion.
The pace of export growth increased by £2 billion, while the rate of imports slowed by -£1.8 billion. Additionally, all the previous month’s deficits were revised lower.
Construction output, however, did marginally disappoint – falling -0.6% on the month in October instead of seeing the pace of growth slow from 0.9% to 0.2% as forecast. However, construction activity advanced 0.7%, which was a significantly better result considering the predictions for a decline of -0.1% after September’s 2.5% uptick. This did not detract from the Pound’s bullishness, though.
EUR GBP Slips Lower, EUR USD Stuck at Opening after ECB Dovishness
Mario Draghi performed his usual trick yesterday of knocking the supports out from under the Euro in his press conference following the European Central Bank’s (ECB) latest policy decision. Markets had widely expected an extension to quantitative easing and that was what they got, along with a reduction of the monthly rate of asset purchases down to €60 billion from April next year.
However, Draghi noted that QE could be extended even further, dashing investor hopes that the cut in the monthly purchase rate was the first signs of the eagerly-awaited taper. He also commented that the 1.7% inflation rate forecast for the end of 2019 was not close enough to the ECB’s target of just under 2% to justify monetary tightening.
This could mean that the ECB is unlikely to begin a normalisation cycle until the beginning of 2020 at the earliest. Unsurprisingly, the Euro plummeted, with GBP EUR continuing to pressure the common currency lower and EUR USD unable to make a recovery, even if it has found support against further losses.
US Dollar Edging Back after Bullish Post-Draghi Charge
The Euro tumbling sent the US Dollar on a bullish charge yesterday, with the ‘Greenback’ finally able to break through the ceiling put in place by enormous bets of Federal Reserve policy tightening. The fact US interest rates are likely to go up while Eurozone borrowing costs remain low is good news for the US Dollar.
A weaker EUR USD exchange rate will increase foreign direct investment in the US. Investors will be more inclined to participate in ‘carry trades’, borrowing Euros at a low interest rate and using them to buy US Dollars, which then allows them to purchase high-yielding US treasuries. Because the Euro and US Dollar are considered safe assets, the risks of extreme exchange rate volatility are limited; a carry trade between a currency like the Euro and the New Zealand Dollar (interest rates are currently 2.00% in New Zealand), for instance, is more risky as the ‘Kiwi’ could plummet or rise sharply.
Today, however, the USD rally has run out of steam and the Pound has been able to recover some of yesterday’s losses on the back of the positive domestic data.
GBP EUR, GBP USD Exchange Rate Forecasts; US Confidence Index Could Pressure Pound and Euro Lower
The day’s UK and Eurozone data has already been released, leaving only US ecostats on the calendar. Key amongst these will be the University of Michigan confidence index, which is predicted to rise from 93.8 to 94.5.
However, while this may firm the US Dollar, the ‘Greenback’ is unlikely to see a particularly strong advance if the index does rise as forecast. Bets of Federal Reserve monetary tightening are still frozen around 95%, leaving little room left for the US Dollar to rise. Markets have already bought USD on the assumption rates will increase, so news that would usually increase hike odds isn’t going to be considered ‘news’ at the moment.
Interbank GBP EUR, GBP USD Exchange Rates
The Pound Euro (GBP EUR) exchange rate was trading around 1.18 at the time of writing, while the Euro Pound (EUR GBP) exchange rate was trending in the region of 0.84.
The Pound US Dollar (GBP USD) exchange rate was trading around 1.26, while the US Dollar Pound (USD GBP) exchange rate was trending in the region of 0.79.
The Euro US Dollar (EUR USD) exchange rate was trading around 1.06, while the US Dollar Euro (USD EUR) exchange rate was trending in the region of 0.94.