Confidence in the Pound was quick to evaporate at the start of the week as the initial impact of the Bank of England’s (BoE) unexpectedly hawkish meeting minutes diminished.
Fresh comments from BoE Governor Mark Carney did not help to shore up the appeal of Sterling on Monday afternoon, leaving the Pound Euro exchange rate on a downtrend.
Although Carney did ultimately echo the message that some degree of monetary policy tightening is likely to be appropriate in ‘the coming months’ his performance was not quite as hawkish as markets had hoped.
Coupled with a fresh row within the Cabinet over Brexit and the UK’s financial obligations to the EU this eroded some of the Pound’s recent gains.
Further softness could be in store for GBP exchange rates in the coming week as August’s UK retail sales data is forecast to show a stagnation on the month.
Weaker levels of consumer spending would highlight the underlying vulnerability of the domestic economy, as growth largely relies on the service sector and consumer confidence.
While markets are unlikely to significantly discount the prospect of a 2017 BoE interest rate hike at this juncture persistently disappointing domestic data could undermine the case for imminent policy action.
Even so, politics looks set to limit the upside potential of the GBP EUR exchange rate for some time to come.
As Morten Helt, senior analyst at Danske Bank noted:
‘Political uncertainty related GBP is likely to increase in the coming weeks as Theresa May is scheduled to speak in Florence on Friday 22 September ‘to update on Brexit negotiations so far’. The speech will attract a lot of attention in the financial markets, as it was the main reason why this week’s Brexit negotiations were cancelled.
‘Furthermore, political uncertainty and Brexit concerns could also become a theme again in connection with the Conservative Party congress running from 1-4 October.’
Euro Set for Volatility on ECB Economic Bulletin
Confidence in the Euro, meanwhile, generally picked up ahead of the latest ZEW economic sentiment surveys as markets anticipated an improvement on the month.
With the US Dollar under pressure once again the appeal of the single currency has strengthened, benefitting from the negative correlation of the EUR USD exchange rate.
As forecasts point towards a solid uptick in the German economic sentiment survey markets maintained a relatively optimistic view of the currency union’s outlook.
The mood towards the Euro could deteriorate later in the week, however, with the release of the European Central Bank’s (ECB) Economic Bulletin.
If policymakers indicate a more optimistic policy outlook this could weigh heavily on the GBP EUR exchange rate, improving the likelihood of the central bank beginning to taper its quantitative easing program in the near future.
On the other hand, any indications that the ECB is likely to leave monetary policy on hold for longer could severely dent the appeal of the Euro.
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