- Update: Dovish IMF forecasts soften Pound – Markets react to slashed UK growth outlook
- GBP EUR advances, GBP USD bullish – Martin Weale talks down cut odds
- Low odds of ECB stimulus changes – Markets confident ahead of Thursday’s policy meeting
- Morgan Stanley Forecast Weakens USD – No rate hike until 2018
- GBP EUR, GBP USD Exchange Rate Forecast – ECB Decision Ahead
GBP EUR, GBP USD Exchange Rates Mixed after UK Sales Data
The Pound Euro and Pound US Dollar exchange rates both declined on Thursday as the UK published poor retail sales figures for June.
However, the GBP/EUR currency pair could return to trending above the 1.20 level before the close of the local session if the ECB adopts a dovish tone with regards to it’s policy outlook in light of the Brexit.
As it stands, GBP/EUR is trading in the region of 1.1969
(Previously updated 09:00 21/07/2016)
Market expectations of a UK interest rate cut were lessened yesterday after a speech by a UK policymaker, and both GBP EUR and GBP USD exchange rates were boosted as a result.
The Pound was also trending higher in response to the UK’s latest employment data, which showed an historic low unemployment rate.
GBP EUR, GBP USD Slides – IMF Claims Brexit has Weakened Growth
Markets weren’t surprised that the International Monetary Fund (IMF) downgraded global growth forecasts today and blamed the UK’s Brexit decision. IMF Head Christine Lagarde has previously warned the UK that a Brexit could cause crashes in the stock and housing markets. When the forecasts were delivered, the result was gloomy for the UK, with -0.9% being slashed from growth expectations for 2017. After making predictions in April for 2.2% growth through 2017, the IMF now expects the UK economy to expand by 1.3%. On a global scale, however, growth was only slightly reduced, suggesting the UK will bear the brunt of its decision to leave the EU.
(Last updated 20th July, 08.55)
The Pound Euro exchange rate is trending in the region of 1.1920 while the Pound US Dollar exchange rate is trending in the region of 1.3186.
Sterling was little changed following the publication of the UK’s latest inflation figures, despite the rate of consumer price pressures increasing by more-than-forecast.
The rate of non-core inflation increased 0.5% on the year, up from 0.3% in May.
(Last updated 20th July, 08.49)
Weale Comments on BoE Rate Cut Odds Boosts Pound (GBP)
Bank of England (BoE) policymaker Martin Weale helped calm the markets yesterday after suggesting that interest rates may not be cut in August. He said that, while the previous meeting minutes did ‘give an indication of where policy may go in the future’, he stressed that this was ‘no more than the best judgement at the time’.
Weale also noted that there seemed to be no immediate need to change monetary policy in order to calm businesses and consumers, stating that;
‘In contrast to the experience of 2008, I do not have any sense that either consumers or businesses are panic-struck and, as I observed, there have been no material signs of financial panic.’
While this boosted the Pound, Weale’s speech was not entirely positive. Speaking on the UK’s economic outlook following the referendum, Weale claimed;
‘My own view is that, despite any savings resulting from a lower contribution to the EU budget, the nation’s income, and thus people’s incomes, are likely to be reduced as a result of the choice made on 23rd June.’
It is worth noting, however, that Weale’s term as a policymaker expires after the next interest rate meeting; if his replacement is more dovish, the odds of further easing before the end of the year will likely increase.
Euro (EUR) Bullish on Low Prospects of Monetary Policy Changes
Although weak against the Pound, the Euro was posting strong gains elsewhere yesterday, including 0.4% against the US Dollar, 0.5% against the New Zealand Dollar (NZD) and Swiss Franc (CHF) and 1.1% against the Japanese Yen (JPY).
This strength came from the fact that markets were widely expecting monetary policy to be left unaltered as a result of Thursday’s upcoming meeting. Markets had been wary that central banks would immediately begin easing policy in response to ‘Brexit’ volatility, however, with the Bank of England leaving rates on hold, forecasts that the ECB will do the same have gained even more credence.
However, one issue that continues to concern markets is the ‘bond squeeze’. The ECB is in the middle of its €1.7 trillion asset purchase programme, which has been extended both in terms of total asset value to be purchased and the duration of the programme. This, combined with Brexit pushing bond yields into negative territory, has meant that the supply of eligible bonds is becoming constricted. Investors are worried that the ECB may soon be unable to find enough securities to purchase in order to keep up with this stimulus; the bank has already diversified into corporate bonds as well as government treasuries.
As Rainer Guntermann, Commerzbank Rates Strategist noted;
‘The ECB probably won’t add to monetary stimulus this week, but it could certainly make tweaks because there’s now a more pressing case to address bond scarcity.’
Morgan Stanley’s Fed Rate Hike Prediction Weakens US Dollar (USD) Further
The US Dollar has been bilaterally weak for some time now thanks to the low chances of an interest rate hike from the Federal Open Market Committee (FOMC). What little hope there was for July’s meeting – which takes place in eight days – has now vanished following a new forecast from Morgan Stanley.
Odds of 1.8% that interest rates would be increased to 0.75% in July have vanished after Morgan Stanley analysts forecast no monetary tightening from the Fed until 2018. While the current consensus for US economic growth over the course of 2017 is for GDP of 2.3%, Morgan Stanley now predicts growth of 1.5%. The bank has suggested investors continue to favour US stocks, predicting that the US economy will disappoint bullish forecasters.
According to Chief Cross-Asset Strategist Andrew Sheets;
‘We think global growth really disappoints over the next 12 months — particularly in developed markets, particularly in the US.’
GBP EUR, GBP USD Exchange Rate Forecasts; Pre-Brexit Inflation Data Ahead
The UK’s consumer price index data for June will give markets a starting point regarding the path of inflation over the coming months once the effects of the weakened Pound start kicking in. Currently, both the core and non-core indexes are predicted to strengthen by ten basis points.
Also of interest to investors will be the results of the Bank of England’s latest Indexed Long-Term Repo Operation (ILTRO). A high demand for liquidity from UK financial institutions could suggest overwhelming Brexit pressures, while a low demand would indicate that the markets are remaining relatively calm.
As well as the ECB Bank Lending Survey and construction output data for the Eurozone in May, July’s ZEW economic sentiment survey results for Germany and the Eurozone will show how businesses are reacting to the UK’s Brexit vote.
After a busy Friday, the US economic calendar has calmed down a bit, with only the tier-2 housing starts figures and low impact building permits data due for release.
Current GBP, EUR, USD Conversion Rates
The Pound Euro (GBP EUR) exchange rate ended Monday’s European session trading in the region of 1.1996, while the Pound US Dollar (GBP USD) exchange rate was trending in the region of 1.3288.