Confidence in the Pound (GBP) remains limited due to persistent Brexit-based uncertainty, and both the Pound to Euro and US Dollar exchange rates were struggling on Monday ahead of this week’s UK inflation data.
- Weaker construction output failed to diminish Pound further – Sterling steadied by technical resistance
- German economy continued to expand strongly – Fresh signs of Eurozone economic divide failed to weigh on Euro
- US retail sales data fell short of forecast – ‘Greenback’ slumped as likelihood of Fed rate hike dimmed
- Weaker UK house prices dented Pound – Signs of weakness in housing market discouraged markets.
Dovish BoE Commentary Added to Downside GBP Exchange Rate Pressure
The appeal of the Pound continued to deteriorate on Monday afternoon, pushing the currency to fresh lows against the Euro and US Dollar. Comments from Bank of England (BoE) policymaker Andy Haldane offered little encouragement to investors, with the suggestion that loose monetary policy was a temporary solution to the Brexit shock. As a result GBP exchange rates extended their losses towards the close of the European session, with hopes not particularly high for Tuesday’s UK inflation data.
(Previously updated at 2:22 on 15/08/2016)
GBP to EUR, USD Static, Inflation Data In Focus
The Pound to Euro exchange rate was trending in the region of 1.1572 on Monday, with the Pound US Dollar exchange rate holding at 1.2929.
Rightmove House Price data showed a month-on-month decline of -1.2% in August, with prices slipping from 4.5% to 4.1% on the year.
Rightmove official Miles Shipside commented: ‘Many prospective buyers take a summer break from home-hunting, and those who come to market at this quieter time of year tend to price more aggressively. This summer is also affected by both Brexit uncertainty and the aftermath of the buy-to-let rush in March to beat the stamp duty deadline.’
The result had little impact on the Pound ahead of Tuesday’s UK inflation data. The CPI data is expected to trigger movement in the British currency.
Economists have predicted that inflation dipped by -0.1% on the month in July and held at 0.5% on the year.
Core inflation is believed to have remained at 1.4% in July.
The US is also set to release inflation figures tomorrow.
As the European session progressed on Monday the GBP EUR exchange rate dropped 0.5%, hitting a low of 1.1505, while the GBP USD exchange rate shed over 0.3% to fall all the way to 1.2867.
(Previously updated 14/08/2016)
Weakness in the US Dollar (USD) has helped to benefit the Euro (EUR), with the odds of the Federal Reserve opting to raise interest rates this year seeming weaker.
Stable House Price Index Predicted to Shore up Pound (GBP) Demand
In spite of June construction output showing a sharper contraction than forecast the Pound (GBP) was able to regain some ground against rivals ahead of the weekend. While the pre-referendum economy appears to have been in a generally weaker state than hoped this was not enough to push Sterling significantly lower. Consolidation trading helped to shore up the Pound, giving the ailing currency some support in spite of the fact that Brexit-based uncertainty is unlikely to diminish for the foreseeable future.
Tomorrow’s Rightmove House Prices Index for August is likely to trigger renewed volatility for the GBP exchange rates, with investors keen to get a further gauge of how the domestic housing market is faring. If the initial pressure seen in the wake of the Brexit vote is found to have abated, at least somewhat, then the Pound could be boosted across the board. Further signs of weakness, on the other hand, would give markets additional impetus to sell out of the currency. A bearish mood is expected to materialise ahead of the latest UK Consumer Price Index data.
Stronger Economic Sentiment Forecast to Weigh on GBP EUR Exchange Rate
The single currency (EUR) was boosted on Friday by a stronger-than-expected showing from the second quarter German GDP data. Forecasts had pointed towards growth of just 0.2% on the quarter, prompting the Euro to rally strongly across the board when the economy was instead revealed to have expanded 0.4%. This indicated that the Eurozone’s powerhouse economy remains in a robust state, helping to counteract the impact of the news that both France and Italy had stagnated in the same period. As the overall Eurozone figure came in as expected at a steady 0.3% there was little reason for investors not to favour the single currency over its rivals.
After a quiet start to the week the Euro will see movement on the back of the ZEW Economic Sentiment Surveys for Germany and the Eurozone. If confidence is indicated to have recovered in the wake of the Brexit-based shock then the Pound to Euro (GBP EUR) exchange rate is likely to trend lower. However, the single currency could remain under pressure if markets remain concerned with the weakness demonstrated by some members of the currency union and its generally lopsided recovery.
Fed Rate Hike Odds Diminished by Disappointing US Retail Sales
Confidence in the US Dollar (USD) weakened markedly in response to a disappointing Advance Retail Sales figure, as consumer demand was shown to have faltered in the last month. Sales dipped from 0.8% to 0.0% in July, suggesting that the world’s largest economy is not in the robust state that the Federal Reserve would hope. This weaker showing was quick to diminish the odds of the Fed achieving an interest rate hike before the end of the year, as this failed to add to the case for policymakers returning to a monetary tightening cycle. As James Knightley, Senior Economist at ING, noted:
‘So with activity being softer than hoped and pipeline inflation pressures looking benign it doesn’t offer much support to the view the Fed will be hiking rates imminently. We favour the next Fed move higher to come in 1Q17.’
Investors will be hoping to see more positive data from the US in the coming week, with bullish data likely to reignite some hopes of the Fed returning to a more hawkish outlook. Monday’s Empire Manufacturing Index could ease some of the concerns still surrounding the health of the domestic manufacturing industry, with the measure expected to strengthen modestly on the month. Greater importance will be afforded to the July Consumer Price Index report, which is forecast to show a slight weakening from 1.0% to 0.9%.