While the initial market reaction to the Supreme Court ruling was disappointment the Pound has since returned to a stronger footing, thanks to hopes that this could limit the government’s push for a hard Brexit.
- Sterling weakened on Supreme Court verdict – Investors discouraged by dismissal of greater role for devolved assemblies
- German IFO expectations index weaker than expected – Demand for Euro diminished by more muted outlook
- Political developments continued to dominate US Dollar sentiment – Markets await more detailed economic plans
- Softer fourth quarter UK GDP forecast to dent Pound – Signs of slowing growth could exacerbate Brexit worries
Pound Trading Positively Ahead of UK GDP Data
On Thursday morning the Pound remained on a stronger footing, despite weak expectations for the UK fourth quarter GDP data. The GBP EUR exchange rate was trending higher at 1.17, while the GBP USD currency pair was making gains in the region of 1.26.
(Previously updated at 12:25 on 25/01/17)
Both the Euro and the US Dollar remained under pressure on Wednesday, lacking the support of positive domestic data.
Pound Sterling (GBP) Volatile on Fresh Brexit Speculation
Sterling (GBP) saw some volatility in the wake of the Supreme Court ruling on Article 50, with the majority backing the verdict that an Act of Parliament is required to start formal exit proceedings from the EU. While this suggested that there may be a greater degree of parliamentary involvement in the process of Brexit, potentially reining in the hard line rhetoric of the government, GBP exchange rates failed to rally in response. Market confidence was instead dented by the ruling that the devolved assemblies do not have to give their consent for the UK to withdraw from the EU, seeming to increase the odds of a second Scottish independence referendum.
Although the Pound began to pick up once again on Wednesday, with an element of optimism returning, this trend could be reversed by the fourth quarter UK Gross Domestic Product report. Growth is predicted to have eased slightly at the end of 2016 to slip from 0.6% to 0.5% on the quarter; a sign which could diminish the appeal of Sterling.
Concerns over the future of the UK are likely to remain the primary driving force of GBP exchange rates, as Jane Foley, Senior FX Strategist at Rabobank, noted:
‘We continue to view the forthcoming Brexit negotiations as a source of uncertainty and see GBP as vulnerable over the medium-term. However, for now May is having some success in countering accusations that the government is muddled and has no plan.’
GBP EUR Exchange Rate Boosted by Softer German Business Outlook
Investors were not impressed to find that the German IFO business sentiment survey was more bearish than forecast. Of particular concern was the dip in the expectations gauge, which fell from 105.5 to 103.2 in January. This could signal that conditions within the Eurozone’s powerhouse economy are less than robust, pointing towards a slower pace of growth over the coming months. The Euro (EUR) softened in response to this shortfall, remaining under pressure in spite of strongly improved Italian industrial data.
Friday’s German Import Price Index results could dent the Pound Euro (GBP EUR) exchange rate, with investors expecting to see a solid increase in prices on both the month and the year. This could boost confidence in the outlook of the German economy, suggesting higher inflationary pressure and possibly offering the single currency a fresh rallying point. In the meantime, the Euro may struggle to attract investors, given the degree of political uncertainty that clouds the coming year.
Weak Home Sales Weighed on US Dollar (USD) Demand
Sentiment towards the US Dollar (USD) has been rather mixed this week, as investors continue to adjust to the realities of the new US administration. With clear economic plans lacking and a disappointing slump in existing home sales for December confidence in the outlook of the US economy faltered, allowing the Pound US Dollar (GBP USD) exchange rate to rally strongly on Tuesday. However, as the latest Manufacturing PMI and Richmond Fed manufacturing index figures both proved positive the underlying bullishness of the ‘Greenback’ remained.
Further support for the US Dollar could come on the back of Thursday’s advance goods trade balance data, which is forecast to show a narrowing of the deficit from -65.3 billion to -64.4 billion. This could reinforce confidence in the resilience of the world’s largest economy, suggesting an improvement in domestic demand. Also of interest will be the latest jobless claims figures, which may boost the GBP USD exchange rate if the job market shows any signs of weakening.
Current GBP, EUR, USD Interbank Exchange Rates
At the time of writing, the Pound to Euro (GBP EUR) exchange rate was trending higher at 1.17, while the Pound to US Dollar (GBP USD) pairing was making gains around 1.25.