Unexpectedly strong British Retail Consortium (BRC) like-for-like sales helped to boost the Pound this week, in spite of signs still pointing towards weakening consumer spending power.
Jitters over Brexit are somewhat limited at this juncture, with markets still confident that the Conservatives will return to power with a larger majority and gain greater leeway.
While the hard line of rhetoric recently adopted by Theresa May has weighed on sentiment investors saw little particular reason to sell out of the Pound during Wednesday’s European session.
Even so, the issue looks set to limit the appeal of Sterling for some time to come, with uncertainty likely to worsen once formal negotiations get under way.
As analysts at Nomura noted:
‘Once the actual negotiations get underway, there may be certain “flashpoints” that catch the markets’ attention, be it a “walkout” from either side during dinner talks or strongly worded political speeches. These will likely prove to be short-term negotiation tactics rather than a sign of the final outcome, albeit the market will price along the Brexit spectrum as appropriate, allowing for tactical trading along the way.’
In the short term, GBP exchange rates could come under renewed pressure if the Bank of England (BoE) policy meeting and quarterly Inflation Report prove dovish in nature.
With noted hawk Kristin Forbes due to leave the Monetary Policy Committee (MPC) shortly markets may hope to see a shift towards hawkishness amongst other policymakers.
If the BoE reiterates its reluctance to return to a monetary tightening bias, though, the Pound could struggle to maintain a positive footing against its rivals.
Any upwards revision to the BoE Inflation Report could also dampen the mood towards Sterling.
Confidence in the Euro remained relatively limited ahead of the latest commentary from European Central Bank (ECB) President Mario Draghi, meanwhile.
Draghi is unlikely to encourage the speculation that the ECB could consider tapering its quantitative easing program in the near future.
This may encourage further Euro weakness, even though the Eurozone economy has shown signs of strong growth in recent data.
If Draghi proves more confident in tone, however, the Pound Euro exchange rate may return to a downtrend.
The shock firing of FBI Director James Comey prompted the US Dollar to slump across the board during Tuesday’s American session.
Markets were severely unsettled by the move, which offered further evidence of the unpredictability of the Trump administration and undermined confidence in its abilities.
As parallels were drawn with the Nixon presidency the Pound US Dollar exchange rate advanced, benefitting from increasing doubts over the tenability of the current administration.
Ahead of the weekend the ‘Greenback’ could find some measure of support if April’s consumer price index report points towards an uptick in inflationary pressure.
While the CPI is not the Federal Reserve’s preferred measure of inflation a solid showing here would nevertheless support the odds of the central bank raising interest rates in June.
Current GBP EUR USD Interbank Interest Rates
At the time of writing, the Pound Euro exchange rate was making gains at 1.19. Meanwhile, the Pound US Dollar exchange rate was on an uptrend around 1.29.