- Higher UK inflation shored up GBP exchange rates
- Euro sentiment dampened ahead of Eurozone production data
- USD jumped following hawkish commentary from Fed policymaker Lacker
- GBP/USD exchange rate forecast to decline further as US retail sales rise
Stronger UK Inflation Boosted Pound Sterling (GBP), ‘Brexit’ Fears Reverse Gains
While consolidation had driven the Pound (GBP) higher at the start of the week, this bullish run was supported by the latest UK Consumer Price Index report. Expectations were for a modest uptick in domestic inflationary pressure from 0.3% to 0.4% on the year in March, leading to a surge in investor optimism when the CPI instead clocked in at 0.5%. This suggested that the UK economy has not experienced such severe slowdown pressures in the face of ‘Brexit’ uncertainty as markets had postulated, boosting confidence.
While the uptick in inflation still leaves consumer price pressures well below the Bank of England’s (BoE) target of 2%, the increase was still a welcome development.
However, after seeing strong gains on the back of this positive data some of Pound Sterling’s gains were reversed as an ICM poll placed the ‘Leave’ camp narrowly ahead of ‘Remain’. A stark reminder of the likely tightness of the June referendum, this set the Pound back on a weaker footing ahead of Thursday’s BoE policy meeting.
The BoE has previously cautioned that the UK’s growth outlook could be affected if the UK votes to break with the European Union. Sentiments echoed by the International Monetary Fund.
Euro (EUR) Trends Lower ahead of Eurozone Industrial Production Data
Despite reassuring German inflation data, the Euro (EUR) softened on Tuesday as talks over the Greek bailout review were paused. Although the involved parties maintained an air of optimism about reaching a final deal in the near future the continued disagreement over pension reforms, bad debts and debt relief kept markets in a muted mood. There were particular concerns that creditors may not reach a satisfactory compromise before the summer, when Greece is faced with hefty debt repayments to both the European Central Bank (ECB) and the IMF.
Confidence in the single currency thus remained a little thin on Wednesday morning, particularly as traders anticipated a weakening in the Eurozone industrial production report. Should domestic output have softened in February the outlook of the currency union is likely to take a blow, although as the ECB’s latest easing barrage will not have had a chance to impact the data the reaction may not be entirely bearish.
US Dollar (USD) Exchange Rate Rallies after Hawkish Fed Comments
Investors flocked back to the US Dollar (USD) in spite of the March Budget Statement revealing a larger deficit than anticipated. Markets are still inclined to favour policymaker commentary over dovish domestic data, with the ‘Greenback’ shored up by comments from Federal Reserve Bank of Richmond President Jeffrey Lacker. Taking a decidedly more hawkish tone, Lacker commented:
‘My sense is that the less leisurely but still gradual pace of target rate increases that the FOMC participants submitted at year-end is still more likely to be appropriate.’
Although Lacker is not one of the voting members of the Federal Open Market Committee (FOMC) this year, the less cautious nature of his commentary triggered a sharp increase in US Dollar demand. The appeal of the currency was also boosted by better-than-expected Chinese trade data, which appears to indicate that global conditions are largely stabilising.
Should this afternoon’s US Advance Retail Sales demonstrate an uptick in consumer demand, and thus confidence, the US Dollar could extend its gains against both the Pound and Euro. Any additional signs of strengthening within the world’s largest economy are only likely to boost hopes of a more imminent interest rate hike from the Fed, particularly if Thursday’s Consumer Price Index reveals growing inflationary pressure.
Current GBP, EUR, USD Exchange Rates
At the time of writing, the Pound Sterling to Euro (GBP/EUR) exchange rate was trending narrowly in the region of 1.2536, while the Pound Sterling to US Dollar (GBP/USD) pairing was slumped around 1.4236. Meanwhile, the Euro to US Dollar (EUR/USD) exchange rate was ceding ground at 1.1352.