- ‘Brexit’ speculation benefitted the Pound – Warnings from BoE and IFS encouraged investor confidence
- Euro on mixed form following Greek bailout agreement – Worries remained over the issue of debt relief
- GBP exchange rates weakened on GDP second estimate – UK economy demonstrated greater slowness at start of year
- Stronger Durable Goods Orders failed to boost US Dollar – Odds of June Fed hike remain lower
Higher UK Consumer Confidence Boosted Demand for Pound Sterling (GBP)
A better-than-expected GfK Consumer Confidence Survey prompted the Pound (GBP) to make fresh gains on Friday morning, as sentiment was shown to have improved from -3 to -1. This raised hopes that higher consumer confidence will bolster the UK economy in the second quarter, allowing the Pound to trend higher against both the Euro (EUR) and the US Dollar (USD).
Looking to next week, the UK’s construction, manufacturing and services PMIs will provide a better indication of how the UK economy is performing in the build up to the EU Referendum.
Germany’s latest inflation figures are also liable to have an impact on GBP/EUR exchange rate trading.
If the report confirms that consumer price pressures accelerated, as forecast, the Euro could advance on its British rival.
Later in the week the Eurozone will be publishing its own inflation and employment reports.
The GBP/EUR exchange rate is currently trending in the region of 1.3143.
(Previously updated at 17:02 on 26/05/2016)
GBP/USD Exchange Rate Remained Weaker after Strong US Data
Although April’s Durable Goods Orders strongly bettered forecast to clock in at 3.4% rather than 0.5% this failed to particularly reinvigorate the US Dollar (USD). Investors remained dismissive of the likelihood of an imminent Fed hike in spite of this more bullish data, although this was not enough to rescue the Pound Sterling to US Dollar (GBP/USD) exchange rate from its downtrend.
(Previously updated at 13:02 on 26/05/2016)
Pound (GBP) Rally Faltered as UK GDP Confirmed to have Slowed in First Quarter
While supportive UK data has been generally lacking this week that did not prevent Pound Sterling (GBP) from maintaining a bullish run against rivals. Demand for the currency was boosted by the latest developments in the ‘Brexit’ debate, as fresh cautions from Bank of England (BoE) Governor Mark Carney and the Institute for Fiscal Studies (IFS) were seen to raise the likelihood of the UK voting to remain in the EU. Investors lowered their odds for a potential ‘Brexit’ as a result, although referendum volatility is likely to exert additional downwards pressure on the Pound ahead of the June vote.
The second estimate of the UK’s first quarter GDP took some of the wind out of the Pound’s sails on Thursday morning, reminding investors of signs of slowness within the domestic economy. Growth on the quarter was confirmed to have slowed to 0.4%, a dip that has been attributed to referendum uncertainty. However, more notably, the year-on-year figure showed an unexpected downward revision from 2.1% to 2.0%, indicating that pressures on the UK economy were more pronounced than previously thought. This raised concerns that hopes of a rebound in growth following the EU referendum could be overstated.
Markit economist Chris Williamson said of the result; ‘The data show an economy reliant on consumer spending to sustain growth, with business investment, construction, manufacturing and exports all in decline.’
Greek Bailout Continued to Weigh on Euro (EUR) Exchange Rate despite Eurogroup Agreement
Confidence in the Euro was muted in the wake of the Eurogroup’s latest meeting with regards to the Greek bailout. Although markets had initially reacted with optimism to the news that the next tranche of bailout funds had been unlocked there was some disappointment that a substantial agreement had not been reached on debt relief. With the International Monetary Fund (IMF) still expressing some reservations over the deal, and a possible return to crisis merely kicked further down the road, this offered limited support for the single currency.
Investors were not particularly encouraged by an unexpected weakening in Italian Retail Sales, which slipped from 0.3% to -0.6% on the month in March. In spite of other, more positive, signs of a pickup in sentiment within the German economy worries remain over the longer term outlook of the Eurozone economy. As Dr Jörg Krämer, Chief Economist at Commerzbank, noted:
‘The Eurozone economy will not be able to decouple from the global economy over the long-term. Since the start of the year, problems in emerging markets seem to be spoiling the mood of companies in the Eurozone. The positive effect of the Euro’s strong depreciation in the second half of 2014 and early 2015 is running out. Companies can no longer compensate for weaker global demand by expanding their market shares.’
US Dollar (USD) Retreats on Oil Rally and Forecast Slowing of Durable Goods Orders
Members of the Federal Open Market Committee (FOMC) have continued to take a hawkish view on monetary policy this week, with policymakers expressing the opinion that interest rates could rise two or three times before the end of the year. Even though doubts remain over the odds of the Fed opting to hike rates in June, markets have continued to price in a higher likelihood of imminent action, boosting the US Dollar.
However, the appeal of the ‘Greenback’ was muted on Wednesday by weaker-than-expected US Services and Composite PMIs. These suggested that the world’s largest economy was not in such a robust state as might necessitate monetary tightening, also lowering the odds of a June rate hike given the stressed data-dependence of the Fed’s decision.
Safe-haven demand was equally dented on Thursday after Brent crude broke back above the psychologically important $50 per barrel mark, leading to a surge in risk appetite. This saw the US Dollar ceding ground against many of the majors, with the possibility of further weakness on the back of the afternoon’s Durable Goods Order report. Should demand have slowed on the month in April, the case for imminent Fed tightening is likely to diminish further.
Current GBP, EUR, USD Exchange Rates
At the time of writing, the Pound Sterling to Euro (GBP/EUR) exchange rate was slumped around 1.3143, while the Pound Sterling to US Dollar (GBP/USD) pairing was trending lower in the region of 1.4684. Meanwhile, the Euro to US Dollar (EUR/USD) exchange rate was trending higher at 1.1173.