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GBP Exchange Rates Weak against EUR, USD despite Rising UK Inflation

  • GBP Exchange Rates Soften as UK Equity Markets Sink – Rise in June’s inflation not enough to offset losses
  • EUR Exchange Rates Mixed as Bond Prices Rise – EU instability continues to limit EUR appeal
  • USD Exchange Rates Hold High Trade Weighting – Near-term Federal Reserve rate hike prospects improve
  • IMF Cut Global Growth Forecasts – Brexit blamed for global economic difficulties

After staging a modest recovery following hawkish comments from Bank of England (BoE) policymaker Martin Weale, the Pound slipped from recent highs. The depreciation is mostly the result of traders taking profits, but also represents continued uncertainty with regards to the UK’s economic and political stability post-Brexit. The GBP USD exchange rate is now trading at a weekly low ahead of British labour market data.

GBP Exchange Rates: Rising British Inflation Not Enough to Prevent Sterling Losses

Despite a string of positive domestic data results, Pound Sterling GBP exchange rates declined versus nearly all of its major peers. This was partly the result of profit taking as investors took advantage of modest Pound gains posted yesterday. However, the Pound also failed to take advantage of positive data results because the reports still pertain to a pre-Brexit Britain.

June’s Consumer Price Index advanced to 0.5% on the year, eclipsing the market consensus of 0.4%. Additionally, annual Core Consumer Prices bettered estimates during the same period.

‘The rising cost of European air flights, possibly boosted by Euro football championships, was the biggest reason for this month’s increase in inflation,’ ONS statistician Phil Gooding said. ‘The growing cost of oil, feeding through to petrol prices, also helped to nudge up CPI.’

UK retail sales data also produced positive results, easing concerns that the uncertainty in the run-up to the EU referendum weighed on consumer spending. June’s Retail Price Index advanced by 1.6%, bettering the median market forecast 1.5%.

Whilst the political situation in the UK has somewhat stabilised now that David Cameron has been replaced as Prime Minister by Theresa May, the political landscape remains fractious. With the opposition party fighting internally, and with so much uncertainty regarding a UK-EU trade deal, traders remain cautious.

On a more positive note, however, big businesses in Asia are investing heavily in UK companies and London property thanks to the low trade weighting of the Pound. This suggests that many are still confident that London will remain the financial hub of the world.

EUR Exchange Rates Mixed despite Weaker-Than-Expected ZEW Survey Results

Euro exchange rates were mixed in the early stages of Tuesday’s European session, although a slight err towards positivity can be linked to speculation that the European Central Bank (ECB) will avoid easing policy to better assess the impact of Brexit.

‘The ECB is close to its limit,’ said Barclays’ chief European economist Philippe de Gudin. ‘As the economy slows as a result of the impact of Brexit on the credibility of the European project, we think other policies will eventually need to be used, such as fiscal policy where it is possible and a deepening of Euro-area integration.’

Also boosting the appeal of the single currency today was the ECB’s Bank Lending Survey which showed that, prior to Brexit, the Eurozone economy was improving.

However, domestic data did not produce positive results which limited EUR exchange rate gains. July’s German ZEW Economic Sentiment Survey declined massively from 19.2 to -6.8. The Eurozone ZEW Economic Sentiment Survey fared worse, falling from 20.2 to -14.7.

The four-year low German ZEW Economic Sentiment Survey result was linked to the Brexit shock.

The Pound to Euro (GBP EUR) exchange rate was trending within the range of 1.1886 to 1.1987 during Tuesday’s European session.

USD Exchange Rates Hold Strong Position ahead of Housing Starts Data

Since the UK voted Brexit the US Dollar has posted consistent weekly gains. The high valued USD is of massive concern to investors amid fears of contracting export growth and delayed Federal Reserve policy tightening.

However, with sinking European stocks weighing on market sentiment, the US Dollar continues to hold a position of strength versus its major peers.

Additional USD tailwinds can be linked to improved bets regarding a near-term Fed rate hike, irrespective of the US Dollar’s high trade weighting. The improved odds of a December rate hike can be linked to a string of recent positive domestic data publications.

‘Traders are pricing in higher chances that the Federal Reserve will raise interest rates sometime this year after US economic reports including retail sales and industrial production signalled improving growth. They saw 44 percent probability the Fed will raise rates by yearend as of Friday, up from 15 percent after the UK’s vote to leave the European Union. US policy makers next meet on July 26 and 27,’ stated Garfield C. Reynolds writing for Bloomberg.

Adding to USD gains today was yet more positive domestic data. June’s Housing Starts growth came in at 4.8%, significantly bettering the median market forecast 0.2%.

GBP Exchange Rates Forecast to Hold Losses on Brexit Uncertainty

Given the mounting uncertainty with regards to the UK’s divorce from the EU and its political and economic fallout, there is a high chance that the Pound will continue to hold a weak trade weighting for some time to come.

As mentioned briefly above, however, this is not necessarily a bad thing. The low trade weighting of GBP exchange rates has improved foreign investment and is likely to see far better export growth.

The Euro is also likely to hold a comparatively weak valuation as the Italian banking crisis and Spain’s consistently below-target budget deficit weighs on EU stability.

Meanwhile, the US Dollar is unlikely to be devalued significantly amid damp market sentiment and positive domestic data results. However, the high valuation may weigh on trader confidence.

The Pound US Dollar (GBP USD) exchange rate was trending within the range of 1.3104 to 1.3272 during Tuesday’s European session.