- GBP exchange rates shrugged off weak domestic data – UK Services and Composite PMIs offered fresh evidence of post-Brexit slowdown
- Euro boosted by robust German data – Optimism limited as Eurozone retail sector remained in contraction territory
- Stronger ADP Employment Change raised hopes ahead of US Non-Farm Payrolls report – Higher levels of employment could encourage Fed to raise interest rates sooner
- Pound weakens markedly in response to BoE interest rate cut – Rates slashed to fresh record low of 0.25%
Weak German Factory Orders Dent Euro (EUR) Demand
The appeal of the Euro (EUR) weakened on Friday morning in response to a severe contraction in German Factory Orders. The measure plunged -3.1% on the year in June as demand within the Eurozone’s powerhouse economy weakened. Consequently the GBP EUR exchange rate recovered some ground, trending narrowly in the region of 1.1786.
However, the Pound was unable to push much higher against its common currency peer as concerns the Bank of England (BoE) will unleash further stimulus in the future kept GBP demand muted.
(Previously updated at 17:01 on 04/08/2016)
Pound Plunges after Bank of England Cuts Interest Rates to Record Low
Despite high expectations for policy easing the Pound (GBP) plummeted against its rivals in the wake of the Bank of England’s (BoE) decision to cut interest rates to a fresh record low of 0.25%. This was accompanied by a substantial expansion of quantitative easing, suggesting that the BoE is willing to act strongly in order to counteract the negative impact of Brexit-based uncertainty. However, there are some doubts amongst investors as to the effectiveness of this stimulus if it is not backed up with meaningful fiscal policy measures. As a result the GBP EUR exchange rate was trending lower in the region of 1.1802, while the GBP USD pairing was on a downtrend around 1.3140 towards the close of the European session.
(Previously updated at 11:17 on 04/08/2016)
In anticipation of the Bank of England (BoE) potentially cutting interest rates to a record low at its August policy meeting Pound exchange rates have been on a bearish trend.
Pound (GBP) Trended Lower in Anticipation of Bank of England Rate Cut
Markets showed a somewhat dismissive attitude to the latest post-Brexit data on Wednesday, despite the Composite PMI for July showing the single largest drop in the survey’s history. There was some measure of relief amongst investors that the contraction evidenced by the service sector was not more severe, as the finalised PMI showed no change from the flash figure of 47.4. While this data suggests that the UK economy has suffered a sharp loss of growth in response to the surprise Brexit vote the Pound (GBP) maintained a stronger footing against its rivals throughout much of the European session.
Confidence in Sterling weakened once again, however, on Thursday morning as markets began to brace for the Bank of England’s (BoE) August policy meeting. Investors have already priced in a near 100% probability of interest rates being cut to a fresh record low but that did not prevent fresh jitters softening the currency further. In spite of the certainty of markets there is still room for the BoE to either exceed or disappoint expectations, as researchers at TDS noted:
‘Uncertainty around the exact mix of policy measures remains high. While we look for a dovish outcome, we also see 45% chance of the BoE disappointing our forecast in some way, and only a 10% chance that it eases more, so the risks are quite skewed.’
Mixed Eurozone PMIs Failed to Shore up GBP EUR Exchange Rate
Although the July raft of Eurozone Services and Composite PMIs proved generally encouraging this was not enough to shore up the single currency (EUR). A profit warning from Commerzbank prompted fresh malaise over the European banking sector, with investors still far from convinced by the results of the European Banking Authority’s (EBA) recent stress tests. Further downside pressure for the Euro came in the form of the June Eurozone Retail Sales results, which failed to strengthen as forecast on the year. Altogether this suggested that the outlook of the currency union remains less than bullish, even though the negative impact of the Brexit vote appears to have been limited in economic terms.
A stronger-than-expected German Construction PMI offered some support to the common currency on Thursday, with the Eurozone’s powerhouse economy continuing to demonstrate solid signs of growth. Some of those gains were limited, however, as the Eurozone Retail PMI failed to recover as far as markets had anticipated. Clocking in at 48.9 rather than 49.2 this demonstrated the continuing struggles of the domestic economy, undermining the appeal of the Euro.
US Dollar (USD) Exchange Rate Forecast to Benefit from Lower Jobless Claims
Wednesday saw another round of rather mixed data for the US, weakening the likelihood of the Federal Open Market Committee (FOMC) returning to its monetary tightening cycle in the near future. The ‘Greenback’ (USD) took some heart from the stronger-than-expected July ADP Employment Change result, with investors hopeful that the higher gauge of employment could bode well for Friday’s more critical Non-Farm Payrolls report. However, the robustness of the world’s largest economy came under more question in response to the latest ISM Non-Manufacturing Composite Index, which indicated that activity in the services sector had weakened more substantially than anticipated in July.
Demand for the US Dollar improved somewhat on Thursday morning, largely benefitting from the more muted mood of the Euro. The afternoon’s Factory and Durable Goods Orders are likely to provoke fresh volatility for the Pound to US Dollar (GBP USD) exchange rate, with expectations weak for both indicators of domestic demand. Also of note will be the latest Jobless Claims figures, which could encourage the ‘Greenback’ ahead of the Non-Farm Payrolls report if the jobs market is indicated to have tightened.
Current GBP, EUR, USD Exchange Rates
At the time of writing, the Pound to Euro (GBP EUR) exchange rate was trending lower around 1.1936, while the Pound to US Dollar (GBP USD) pairing was slumped in the region of 1.3297.