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Can Pound Sustain Rally vs Euro, US Dollar as Lords Debate Article 50 Bill?

At the start of the week the Pound returned to a stronger footing against both the Euro and the US Dollar, as the House of Lords prepared to debate the government’s Article 50 bill.

Investors appear confident that Theresa May’s timetable for Brexit will not be thrown out, even though peers are expected to give the bill more scrutiny than MPs.

This optimistic mood could keep the Pound buoyant even if the Lords opts to amendment the bill, which would send it back to the Commons for a fresh debate and could incite an episode of parliamentary ping pong.

Even so, underlying support for Sterling has been diminished thanks to the weakness of recent domestic data, in particular Friday’s unexpectedly weak January retail sales figures.

As researchers at ANZ noted:

‘Over the past six months sales have been flat. The notion of a booming consumer (a source of strength) is fading and as inflation picks up, that will erode consumer’s purchasing power (particularly given slow wage growth). One of BOE Governor Carney’s key judgments (and reasons for keeping rates low) was that consumers will falter, and so far that looks to be panning out.’

The strength of GBP exchange rates could diminish in response to commentary from Bank of England (BoE) Governor Mark Carney, who is due to speak before parliament on Tuesday.

If Carney indicates that the Bank is likely to remain on hold with regards to interest rates for longer, given the signs that consumer spending is already being reined in, then the Pound may rapidly return to a bearish trend.

Also in focus will be January’s UK public sector net borrowing figure, which could reassure investors if the government posts a surplus at the start of the year.

Confidence in the Euro weakened, meanwhile, as the deadlock between Greece and its creditors showed no signs of coming to an end.

Although December’s Greek current account deficit narrowed from -1.19 billion to -0.93 billion this was not enough to improve the mood towards the single currency, with worries of a fresh debt crisis sill present.

Any comments from the Eurogroup meeting of finance ministers could prompt volatility for the Pound Euro (GBP EUR) exchange rate, particularly if the prospect of debt relief is dismissed once again.

With markets betting that the Federal Reserve will opt to raise interest rates sooner rather than later the underlying trend of the US Dollar remains bullish, on the other hand.

A strong showing from February’s raft of US PMIs could weigh on the Pound US Dollar (GBP USD) exchange rate, especially in the wake of Sterling’s solid start to the week.

However, investors may be wary of piling back into the ‘Greenback’ given the already-high pricing of a March rate hike.