- Pound weakens on policymaker U-turn – Martin Weale more dovish after UK PMIs
- GBP EUR holds gains thanks to Italy fears – Banking sector continues to dominate sentiment
- Pound US Dollar exchange rate advances – JPY strength and FOMC speculation weaken USD
- GBP EUR, GBP USD forecasts – UK GDP and US FOMC meeting in focus
GBP EUR, GBP USD Exchange Rates Down Following Fed Interest Rate Decision
Both the GBP EUR and GBP USD exchange rates declined on Thursday as markets responded to the Federal Reserve’s interest rate decision. The Fed left rates on hold and, despite some hawkish commentary, expectations for a September adjustment are slim.
The US Dollar subsequently declined, pushing the Euro higher against peers like the Pound in the process.
Sterling proved unable to advance on the US Dollar with investors looking ahead to next week’s Bank of England (BoE) interest rate decision.
The Euro was also supported by Germany’s better-than-forecast inflation data for July. The rate of consumer price gains accelerated from 0.1% to 0.3% on the month and 0.3% to 0.4% on the year.
(Previously updated 27/07/2016)
Banks were in focus yesterday, with UK and US central bank speculation and concerns over the Italian banking sector weakening GBP EUR and GBP USD exchange rates.
While the Pound’s declines were comparatively limited, concerns that the UK is on the verge of recession may keep the British currency pressured for the foreseeable future.
UK growth may have accelerated in the second quarter of the year, but economists widely expect to see a reversal of this trend following the UK’s decision to exit the European Union.
Pound Softens after Bank of England (BoE) Policymaker U-Turn
The Pound weakened during yesterday’s session after previously hawkish Bank of England (BoE) policymaker Martin Weale readjusted his position. While not explicitly suggesting a rate cut was now necessary, Weale noted that the recent data had been ‘a lot worse’ than he expected. Weale’s argument had originally been that the BoE should wait for more data before acting.
Helping the Pound remain in positive territory, however, was the news that UK banks had largely rejected additional liquidity from the BoE at its latest auction. The BoE offered to buy illiquid assets for liquid cash to improve funding, but UK banks took only £75 million, compared to last week’s £250 million. This showed that the financial sector is coping well with any post-Brexit referendum turbulence.
Euro Weakens as Investors Focus on Italian Banking Crisis
There was no Eurozone data scheduled for release yesterday, so the Euro was left to be driven mostly by market sentiment. Investors focussed on the continuing Italian banking crisis, especially with the European Banking Authority due to release the results of the latest round of stress tests this Friday.
However, while concerns may have been weighing on investors, Italian Finance Minister Pier Carlo Padoan dismissed the idea of a crisis. Padoan stated;
‘All the countries should relax: there is no Italian banking problem. There is an economy which has been in recession for three years, there is accumulated non-performing loans, which have been dealt with. We are not on a bailout regimen, we are in a bail-in regimen, and all the instruments that are considered are within those rules. There is no need to bail out anybody.’
Despite his comments, the Euro was languishing in negative territory at the close of yesterday’s European session.
Anticipation of Federal Reserve Monetary Policy Meeting Keeps US Dollar Weak
The US Dollar weakened yesterday thanks to trader reluctance to adjust their positions ahead of the Federal Open Market Committee (FOMC) decision later today. The outcome of the actual policy meeting is widely considered a given, with no changes to policy having been forecast. Chief Economist for GAM asset management Larry Hatheway, commented;
‘The Federal Reserve is unlikely to announce a change in its target Fed Funds rate at the conclusion of this week’s Federal Open Market Committee (FOMC) meeting. A hallmark of the Yellen Fed, and its predecessors, is clear communication regarding policy decisions, avoiding surprises. Given the uncertainties the Fed had cited around ‘Brexit’ as well as the weakness of the May employment report, the Fed is widely believed to be ‘on hold’, a view it will almost certainly confirm this week.’
Investors are still eagerly awaiting the meeting, however, as the accompanying monetary policy statement could contain clues regarding the Fed’s outlook for future monetary policy. Markets are hoping that the FOMC statement will show policymakers are more optimistic going forwards thanks to recent positive data.
The US Dollar was also weakened yesterday thanks to a strengthening Japanese Yen. Investors don’t believe any additional stimulus measures that might be announced by the Bank of Japan (BOJ) on Friday will be effective enough to adequately boost the economy. As a result, traders piled into the safe-haven Japanese Yen, pushing down demand for other secure currencies such as the US Dollar.
GBP EUR, GBP USD Exchange Rate Forecasts; UK GDP, German GfK, FOMC Decision in Focus
Today promises to be a busy day for GBP EUR and GBP USD exchange rate volatility. UK gross domestic product figures for the second quarter are expected to show finalised growth of 2.1% on the year; a ten basis point revision upwards on previous estimates.
German GfK consumer confidence figures may not move the Euro much due to the marginal nature of the forecast weakening.
The FOMC interest rate decision will be announced later this evening. No changes are expected, but markets will be carefully combing through the accompanying statement.
GBP EUR, GBP USD Conversion Rates
The Pound Euro (GBP EUR) exchange rate trended in the region of 1.1956, while the Pound US Dollar (GBP USD) exchange rate traded around 1.3133 towards the end of yesterday’s European session.