UK Inflation Betters Forecast to Boost Pound Sterling (GBP) Exchange Rates
After March’s UK inflation data showed an unexpectedly strong uptick from 0.3% to 0.5% the Pound (GBP) extended its bullish run against rivals. As a result the Pound Sterling to Euro (GBP/EUR) and Pound Sterling to US Dollar (GBP/USD) exchange rates climbed to fresh weekly highs, although some of this bullishness has faded towards the close of Tuesday’s European session.
Pound Sterling (GBP) Trends Cautiously ahead of UK Inflation Data
Ahead of the UK Consumer Price Index report the Pound (GBP) softened slightly. As a result the Pound Sterling to Euro (GBP/EUR) exchange rate was trending narrowly around 1.2474, while the Pound Sterling to US Dollar (GBP/USD) pairing was making minor gains in the region of 1.4252.
Whether or not the Pound is able to resume its bullish run depends on the outcome of the CPI report. If non-core annual inflation improves as forecast, demand for the Pound could return.
Hopes for a successful resolution to the UK steel crisis helped to boost the Pound (GBP) on Monday morning, while speculation over central bank policy dented the Euro (EUR) and US Dollar (USD).
Potential Salvation for UK Steel Industry Boosts Pound Sterling (GBP)
Friday’s UK data proved largely disappointing, with industrial production unexpectedly falling into a state of contraction and the country’s February trade deficit proving wider than anticipated. This did not offer much encouragement to the Pound (GBP), particularly as the government’s decision to launch a pro-EU leaflet campaign with taxpayer money provoked fresh ‘Brexit’ ire. However, consolidation has been helping to drive Pound Sterling higher against rivals, as the softness of the currency encourages investors to return.
Optimism also grew in response to anticipation of an imminent deal to secure the future of Tata Steel’s loss-making UK assets.
According to The Guardian: ‘Tata Steel UK is currently losing more than £1m a day, although some advisers are confident that if full restructuring were implemented, the struggling operations could be making a £100m profit within 24 months.’
The latest rally could be extended further if March’s Consumer Price Index report, due for release on Tuesday, demonstrates a continued uptick in UK inflation. Stronger inflationary pressure would go some way to reassuring markets that the domestic economy is not being overly damaged by the pressure of ‘Brexit’ uncertainty.
Euro (EUR) Softens after Schäuble Calls for ECB Monetary Tightening
Confidence in the Euro (EUR) took something of a blow after German Finance Minister Wolfgang Schäuble indicated dissatisfaction with the easing bias of central banks at this juncture. To some extent echoing the more hawkish outlook of Bundesbank President Jens Weidmann, Schäuble suggested that the European Central Bank (ECB) should be ‘encouraged’ to begin slowly tightening monetary policy. This did not overly reassured markets, especially given the still fraught nature of negotiations between Greece and its creditors over the latest tranche of bailout funding.
A marked weakening in Italian industrial production was equally discouraging Euro support on Monday morning, as output was found to have fallen from 3.8% to 1.2% on the year in February. Some confidence in the outlook of the Eurozone economy could be restored by the finalised German Consumer Price Index on Tuesday, which is anticipated to confirm a modest uptick in inflationary pressure. Any disappointment or suggestion of weakening, however, may increase the downside pressure against the single currency.
US Dollar (USD) Exchange Rate Softens ahead of Fed Commentary
While China’s latest inflation data somewhat disappointed expectations, clocking in at 2.3% rather than 2.4%, the resultant increase in risk aversion failed to particularly shore up the US Dollar (USD). Despite the bullishness of recent US data, with February’s Wholesale Inventories report suggesting a larger-than-expected rise in consumer demand, the mood towards the ‘Greenback’ remained muted. Some of this decline is also likely attributable to the persistent strength of the Japanese Yen (JPY), which remains the safe-haven asset of choice for investors after climbing to a seventeen-month high against the US Dollar.
Comments from two members of the Federal Open Market Committee (FOMC) could shore up the US Dollar exchange rate later on Monday, however, should they prove more hawkish. Markets are increasingly inclined to expect a slower pace of monetary tightening from the Fed, a prospect which has been weighing on the ‘Greenback’ recently. Any renewed suggestions of dissent amongst policymakers are likely to encourage the currency to regain some of its lost ground against rivals by increasing hopes of a more imminent interest rate hike.
Current GBP, EUR, USD Exchange Rates
At the time of writing, the Pound Sterling to Euro (GBP/EUR) exchange rate was making gains in the region of 1.2468, while the Pound Sterling to US Dollar (GBP/USD) pairing was trending higher at 1.42000. Meanwhile, the Euro to US Dollar (EUR/USD) exchange rate was trending narrowly around 1.1391.