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Pound Euro, US Dollar Forecast: GBP Exchange Rates Muted After BoE Carney Questioning

The mood towards Pound GBP exchange rates has remained generally muted as markets await testimony from Bank of England Governor Mark Carney to the House of Lords Economic Committee.

  • Pound Euro, US Dollar Forecast – Pound exchange rates struggled despite improved CBI business optimism
  • German business sentiment strengthened unexpectedly in October – Euro benefitted despite CETA worries
  • Fed commentary boosted likelihood of December rate hike – GBP USD exchange rate trended lower as markets priced in higher odds
  • Weaker US consumer confidence predicted to diminish US Dollar demand – ‘Greenback’ remains vulnerable to downside surprises

Pound Trended Narrowly Ahead of UK Mortgage Data

After suffering a sharp slump on Tuesday afternoon the Pound has recovered some measure of strength. However, GBP exchange rates remain muted as investors await the latest UK mortgage data. As a result the GBP EUR exchange rate was trending narrowly at 1.11, while the GBP USD pairing was making modest gains around 1.21.

(Previously updated at 08:36 26/10/16)

While dissension in Belgium halted progress on the EU-Canada free-trade deal, the Euro has recovered some of its losses, although the possibility of further volatility remains.

Pound Sterling (GBP) Rate Volatility Forecast on BoE’s Carney Comments

Despite the CBI Business Optimism Index rallying sharply from -47 to -8 in October the mood towards Pound (GBP) exchange rates remained decidedly muted on Monday. Brexit-based worries have continued to hamper Pound Euro and Pound US Dollar exchange rates, particularly after talks between Prime Minister Theresa May and the heads of the devolved nations were deemed ‘frustrating’. With the UK still looking to be heading towards a harder form of Brexit, there has been little reason for the Pound to trend higher, although Sterling has so far managed to hold steady against its rivals for the time being.

Confidence in the Pound remained limited on Tuesday, with markets adopting a more bearish outlook ahead of the latest commentary from Bank of England (BoE) Governor Mark Carney. The House of Lords Economic Committee will be questioning Governor Carney on the Bank’s response to the referendum and the low interest rate environment. Also of note will be any indications as to whether Carney intends to extend his term at the BoE, with Pound (GBP) exchange rates likely to react positively to the suggestion of Carney remaining at the helm for longer.

Euro Exchange Rates Boosted by Improved German Business Sentiment Survey

Although October’s raft of Eurozone PMIs surprised to the upside, this failed to particularly bolster Euro (EUR) exchange rates at the start of the week. There was some relief that activity in Germany’s manufacturing and service sectors had picked up solidly on the month, indicating that the Eurozone’s powerhouse economy remains robust.

Even so, the Pound Euro (GBP EUR) exchange rate was able to make some modest gains during Monday afternoon after progress on the EU-Canada free-trade deal stalled. As dissension from the Wallonia parliament prevented Belgium from committing to sign the CETA treaty on Thursday, the appeal of the single currency declined. The potential collapse of the landmark deal, which has been more than seven years in the making, did not offer particular encouragement in the outlook of the Eurozone economy.

Demand for the Euro recovered somewhat on Tuesday morning, thanks to a better-than-expected IFO Business Sentiment Survey. As confidence within the German economy continued to pick up and general market risk appetite declined, the GBP EUR exchange rate was prompted to cede its earlier gains. Nevertheless, further developments in the CETA situation are likely to provoke continued Euro volatility over coming days.

Rising Odds of December Fed Rate Hike Weighed on GBP USD Exchange Rate

While the Pound Euro (GBP EUR) exchange rate fluctuated in response to Eurozone data, the Pound US Dollar (GBP USD) exchange rate was experiencing volatility as a result of Federal Reserve interest rate hike expectations.

Comments from Chicago Fed President Charles Evans provided the US Dollar (USD) with a boost, encouraging markets with his belief that interest rates will be raised three times before the end of 2017. This more hawkish suggestion saw the odds of a December rate hike increase, with markets pricing in a 70% probability of such a move. However, other Fed speakers adopted a more dovish tone, with a 2016 rate hike still far from a done deal at this juncture. As researchers at BNP Paribas noted:

‘With our positioning analysis showing long USD exposure has built up quickly to levels last seen in early 2016, we are wary that a setback for the risk environment or downside surprises in US data would leave the dollar vulnerable.’

As forecasts point towards a weaker showing from the latest US Consumer Confidence Index the Pound US Dollar (GBP USD) exchange rate could thus see some upside bias on Tuesday. Investors anticipate that consumer sentiment softened from 104.1 to 101.0 in October, something which would suggest that optimism is somewhat limited within the world’s largest economy.

Current Interbank Exchange Rates

At the time of writing, the Pound Euro (GBP EUR) exchange rate was trending lower around 1.12, while the Pound US Dollar (GBP USD) pairing was trending narrowly at 1.22.