The mood towards the Pound turned rather bearish as markets braced for the Autumn Statement, with expectations of more fiscal stimulus measures already limited.
- Government on track to overshoot borrowing target for 2016-2017 – Limited prospect for greater fiscal stimulus dented Pound outlook
- Euro appeal limited by unimpressive German PMIs – Signs of softness in Eurozone’s powerhouse economy persisted
- High expectations of Fed interest rate hike underline US Dollar demand – GBP USD exchange rate trended lower on prospect of inevitable tightening
- Unchanged third quarter UK GDP could boost GBP exchange rates – Robust growth data could encourage greater Sterling confidence
Pound Exchange Rates Rallied Despite Downbeat Autumn Statement
In the wake of the Autumn Statement GBP exchange rates rebounded sharply, driven higher by the government’s abandonment of its goal to achieve a budget surplus by 2019/2020. This helped to limit the impact of the OBR’s lowered growth forecasts and bearish outlook on the UK economy, although these could drag on the Pound tomorrow.
As a result the GBP EUR exchange rate was trending higher around 1.17, while the GBP USD pairing was making gains in the region of 1.24 towards the close of the European session.
(Previously updated at 14:11 on 23/11/16)
While the US Dollar continued to benefit from Fed rate hike speculation the appeal of the Euro has been more muted, thanks to growing political worries and weak domestic data.
Autumn Statement Jitters Weighed on Pound Sterling (GBP) Demand
The appeal of the Pound (GBP) largely declined in anticipation of the Autumn Statement, with investors discouraged by the apparent lack of fiscal stimulus and continued austerity measures. Given that the government remains on track to majorly overshoot its borrowing target for the 2016-2017 fiscal year, as indicated by Tuesday’s public sector net borrowing data, there has seemed to be little particular cause for confidence in Sterling. However, as Lee Hardman, currency analyst at MUFG, noted:
‘Overall, we do not expect the Autumn Statement to have a material impact on the Pound. A modest loosening of fiscal policy is unlikely to offer much support for the Pound. At the margin it will support our view that the UK economy will continue to outperform relative to more downbeat consensus expectations in the year ahead, which should help to further ease bearish sentiment towards the Pound.’
Friday’s second revision of the third quarter UK GDP data could offer GBP exchange rates something of a boost ahead of the weekend. While the headline figure is unlikely to see a revision, maintaining the solid uptick from 2.1% to 2.3% seen in the first estimate, this could nevertheless encourage a more optimistic view of Sterling.
Disappointing German PMIs Boosted GBP EUR Exchange Rate
November’s raft of Eurozone PMIs did little to bolster the Euro (EUR) on Wednesday morning, despite the measures for the overall currency union demonstrating an unexpectedly solid uptick on the month. Confidence was discouraged by the weaker-than-expected performance of the German economy, which raised fresh concerns over the resilience of the Eurozone’s powerhouse economy. With the political risk factor still high, given signs that Italian Prime Minister Matteo Renzi is heading for defeat in a referendum over constitutional reforms, investors remain somewhat wary of the single currency.
Nevertheless, Thursday’s IFO business sentiment survey and the GfK consumer confidence index may prompt the Pound Euro (GBP EUR) to cede some of its recent gains. If sentiment within the German economy continued to shrug off the negative impact of the Brexit vote and other geopolitical upsets then the Euro could trend higher. On the other hand, any fresh signs of softness within the Eurozone’s powerhouse economy could encourage further selling of the common currency.
High Pricing of 2016 Fed Rate Hike Limits US Dollar (USD) Upside Potential
Expectations remain high for the Federal Reserve to raise interest rates before the end of the year, particularly after stronger existing home sales data for October. Markets have priced in an imminent return to monetary tightening as a near-certainty, offering solid support to the US Dollar (USD). However, with the impact of a hike already factored into the ‘Greenback’ scope for further gains has been a little limited, particularly given the persistent uncertainty surrounding the policies of the Trump presidency.
The relative confidence of investors could diminish the impact of the Federal Open Market Committee’s (FOMC) November meeting minutes, even though these are likely to reinforce the current hawkish expectation. Should the minutes point towards greater hesitance amongst policymakers then the Pound US Dollar (GBP USD) exchange rate could make some fresh gains, with any doubts over the Fed’s rate hike prospects likely to weigh heavily on the ‘Greenback’.
Current Interbank Exchange Rates
At the time of writing, the Pound Euro (GBP EUR) exchange rate was slumped in the region of 1.16, while the Pound US Dollar (GBP USD) pairing was trending lower around 1.23.