The latest raft of UK trade and production data proved mixed, leaving the Pound lacking in any particular support ahead of the weekend.
Confidence in the resilience of the domestic economy dipped in response to weaker-than-expected manufacturing production figures, with both manufacturing and industrial output having contracted on the month.
While the visible trade deficit showed a surprise narrowing, from -10.9 billion to -10.8 billion at the start of the year, this was not enough to boost demand for Pound Sterling.
Although a narrower deficit bodes well for the UK’s ability to weather future market turbulence and uncertainty investors were nevertheless deterred by the latest indications that economic activity is slowing.
With Theresa May’s deadline for the triggering of Article 50 drawing closer these signs of the negative impact of Brexit-based uncertainty naturally diminished the appeal of GBP exchange rates.
However, as the service sector remains the primary engine of UK growth this disappointment was not enough to provoke a more substantial downtrend.
Demand for Sterling is unlikely to pick up ahead of Thursday’s Bank of England (BoE) policy decision, as the tone of policymakers looks set to remain dovish.
If the BoE maintains the view that the next change to interest rates could just as likely be up as down, though, the Pound could find some manner of support.
On the other hand, if the Monetary Policy Committee (MPC) adopts a more cautious view on monetary policy then markets could see little reason to favour Sterling in the near future.
Confidence in the Euro, meanwhile, improved thanks to the surprisingly hawkish tone of European Central Bank (ECB) President Mario Draghi.
As Draghi commented that the deflation risk has ‘largely disappeared’, and appeared less averse to the prospect of interest rates rising, this encouraged bets that the central bank could be shifting from its easing bias.
A greater-than-expected narrowing of the German trade surplus was not enough to boost the Pound Euro exchange rate, however, as the single currency continued to trend higher on monetary policy speculation.
The Pound to US Dollar exchange rate made some modest gains ahead of the weekend, benefitting from a lower level of ‘Greenback’ demand.
While investors have strong expectations for February’s US labour market data the US Dollar has struggled to extend its upwards momentum at this juncture.
This has been thanks to the fact that an imminent Federal Reserve interest rate hike has already been priced in.
As analysts at Danske Bank noted:
‘At the moment, it seems that it would take a significant downside surprise to keep the Fed from hiking. We estimate a non-farm payroll of 190,000, although Wednesday’s strong ADP report suggests that risks to this estimate are on the upside. Furthermore, we expect to see some reversal in average hourly earnings after weakness in wages in financial activities dragged them down in January.’
Nevertheless, if the payrolls report surprises substantially to the upside and wage growth proves robust this could put renewed pressure on the GBP USD exchange rate.
At the time of writing, the Pound Euro exchange rate was slumped around 1.14, while the Pound to US Dollar exchange rate was trending narrowly at 1.21.