The mood towards the Pound deteriorated on Tuesday morning, with investors discouraged by the speed at which the government is expected to push its Article 50 bill through Parliament.
- Resurgent Brexit worries weighed on Sterling – GBP exchange rate volatility expected in response to parliamentary debate
- Euro surged on strong Eurozone data – Unemployment, GDP and inflation data all bettered expectations
- Political worries limited US Dollar appeal – Market fallout from condemned US travel ban continued
- BoE inflation forecast set to provoke Pound movement – Greater odds of rate hike could shore up Sterling
Demand for the Euro rose in response to a raft of unexpectedly positive Eurozone data while the US Dollar recovered some of its strength in the wake of the latest political developments in the US.
Brexit Jitters Hampered Pound (GBP) Ahead of Article 50 Parliamentary Debate
As Parliament prepared to begin debating the government’s Article 50 bill the appeal of the Pound (GBP) remained generally muted, with investors still jittery over the speed at which the legislation is expected to be pushed through. The prospect of the government being given an effective blank cheque ahead of its negotiations with the EU is not considered positive for Sterling, limiting the upside potential of GBP exchange rates at this juncture. If the bill passes without amendment, despite the dozens of proposed additions tabled by MPs, this could see the Pound weaken further as the odds of a hard Brexit rise.
Some volatility is expected in response to Thursday’s Bank of England (BoE) policy meeting, particularly with the release of the Bank’s latest inflation report. Markets will be keen to see whether policymakers have revised their inflation expectations for the coming year, and if this is encouraging a more hawkish outlook on monetary policy. If Governor Mark Carney is seen to be more open to the possibility of raising interest rates in the near future this could see GBP exchange rates rally strongly.
GBP EUR Exchange Rate Slumped on Strong Eurozone GDP and Inflation Data
Confidence in the Euro (EUR) strengthened sharply in response to an unexpected dip in the Eurozone unemployment rate, which fell from 9.7% to 9.6% in December. The appeal of the single currency was also boosted by stronger-than-expected GDP and Consumer Price Index results, which both pointed towards greater robustness within the economy of the currency union. Altogether this was seen to increase the pressure on the European Central Bank (ECB) to consider moving away from its current easing bias, despite the recent dovishness of policymakers.
However, as Julien Lafargue, European equities strategist at JP Morgan, noted:
‘Headline inflation is clearly picking up in the Eurozone, but a lot of that is linked to energy price base effects (+8.1% compared with +2.6% in December). As highlighted in their most recent press conference, the ECB itself is willing to look through these transient gains. As such, we believe that it is too early to call for any sort of further “tapering” in the region, especially ahead of a very busy political agenda.’
If ECB officials continue to talk down the possibility of any adjustments to the quantitative easing program the Pound Euro (GBP EUR) exchange rate may find some support. Developments in Greece could also dampen the appeal of the single currency this week, as the deadlock with creditors over bailout conditions remains unbroken.
US Dollar (USD) Forecast to Trend Higher if Fed Meeting Proves Hawkish
The widespread condemnation of Donald Trump’s executive order travel ban weighed heavily on the US Dollar (USD) at the start of the week. Concerns over the volatile nature of the new US administration and the possible negative implications for global trade led investors to sell out of the ‘Greenback’, offering support to the Pound US Dollar (GBP USD) exchange rate. However, this weakness was somewhat limited thanks to anticipation of the Federal Reserve’s January policy meeting and continued hopes of fiscal stimulus to come.
No change in policy is expected from the Federal Open Market Committee (FOMC) on Wednesday, although any hawkish signals from policymakers could shore up the US Dollar. Expectations continue to point towards multiple interest rate hikes over the course of 2017, with markets hoping for the meeting to yield some hint towards the likely timing of the first. If investors view a rate hike as more imminent this would push the GBP USD exchange rate lower, especially if political unrest mounts further.
Current Interbank GBP EUR, GBP USD Exchange Rates
At the time of writing, the Pound Euro (GBP EUR) exchange rate was trending lower at 1.16, while the Pound US Dollar (GBP USD) currency pair was slumped in the region of 1.24.