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Pound Weakens vs Euro, US Dollar after Dip in UK Mortgage Approvals

With markets sluggish after the Christmas break GBP exchange rates have trended lower across the board, spurred by an unexpected drop in domestic mortgage approvals.

  • UK mortgage approvals dipped in November – Pound weighed down by signs of weakening housing market
  • ECB noted higher recapitalisation target for Monte dei Paschi – EUR exchange rates hampered by fresh Italian banking sector worries
  • Strong consumer confidence index boosted US Dollar – Markets remain assured in prospect of further Fed rate hikes
  • Political speculation forecast to dominate GBP EUR exchange rate outlook – Brexit uncertainty likely to limit Sterling upside

While the US Dollar has remained buoyed by the prospect of continued policy tightening from the Fed, however, the strength of the Euro has been limited by concerns over the future of the Italian banking sector.

GBP Exchange Rates Trended Lower on Disappointing Housing Data

The strength of the UK housing market came into question after the BBA mortgage approvals figure for November fell short of forecast, clocking in at 40,659 rather than the 41,400 that had been hoped for. This undermined confidence in the market, suggesting that confidence among consumers and lenders alike has declined. An unexpected profit warning from housebuilder Bovis Homes exacerbated the bearish mood on Wednesday, leaving the Pound (GBP) on a weaker footing across the board.

Expectations are not high for Thursday’s Nationwide house prices data, which could also demonstrate a loss in momentum within the domestic economy. Forecasts point towards a moderation in price growth with a dip from 4.4% to 3.8%, a result which would add downside pressure to GBP exchange rates. With the markets continuing to lack any particular clarity with regards to the government’s approach to Brexit the appeal of Sterling is expected to remain limited as 2016 draws to a close.

Fresh Worries over Italian Banking Sector Limited Euro (EUR) Demand

Despite earlier optimism worries over the future of Monte dei Paschi mounted once again, with the European Central Bank (ECB) revising its recapitalisation assessment of the struggling Italian lender. The ECB indicated that the bank would require 8.8 billion Euros of fresh liquidity, as opposed to the earlier estimate of 5 billion Euros. Naturally this reignited concerns over the Italian government’s ability to shore up the bank, denting the appeal of the Euro and limiting the losses of the Pound Euro (GBP EUR) exchange rate.

Speculation over the shifting political landscape of the Eurozone is likely to limit the strength of the single currency in the medium term, with the uncertain outcome of the upcoming French and German elections weighing on demand. Signs of an early election in Italy could also boost the GBP EUR exchange rate, having the potential to increase concerns over the domestic banking sector. As Kit Juckes, research analyst at Societe Generale, noted:

‘The tailwind behind populist and anti-establishment politicians, however, is likely to scare buyers away from the euro until after the [elections], unless opinion polls show a very clear outcome.’

GBP USD Exchange Rate to Weaken on Narrowed US Goods Deficit

A stronger-than-expected US consumer confidence index for December offered fresh support to the ‘Greenback’ (USD), rising from 109.4 to 113.7 on the month. Another sign that optimism within the world’s largest economy remains robust saw the Pound US Dollar (GBP USD) exchange rate trending lower. With expectations of further Federal Reserve monetary tightening rising the underlying fundamentals of the US Dollar remained strong, particularly as the latest manufacturing data proved bullish.

Investors are anticipating a narrowing of the advance goods trade deficit in November, a result which would give further indication of the US economy’s resilience. However, if this falls short of forecast then the limited trade volumes of the post-Christmas period could see the GBP USD exchange rate regain some ground. While even a disappointing result is unlikely to deter the Fed from raising interest rates further in 2017 any weakness could limit the appeal of the US Dollar in the short term.

Current Interbank Exchange Rates

At the time of writing, the Pound Euro (GBP EUR) exchange rate was trending lower in the region of 1.17, while the Pound US Dollar (GBP USD) pairing was slumped around 1.22.