Political uncertainty continues to act as a significant break on the Pound’s fortunes. Despite better than expected economic data yesterday, the Sterling exchange rate only saw modest gains over the US Dollar (GBP/USD) and Euro (GBP/EUR). Further clarity over who may win the Conservative Party election and whether this means a general election can be averted could now be the most significant driver as to whether the Pound can make a sustained move higher.
British Pound Rises on Hopes of BoE Optimism, Despite UK Political Woes
The Pound jumped yesterday after better-than-expected wage growth figures emerged. The solid performance here added weight to the idea that despite Brexit uncertainty, the Bank of England (BoE) may soon find itself as the outlier in terms of monetary policy. Unlike the Federal Reserve and the European Central Bank (ECB) who are both now on a dovish footing, the inflationary pressures that come with rising salaries have upped expectations that the Bank of England may need to be hiking interest rates. This could quite possibly happen at a fastwe pace than many expect in a bid to keep inflation close to the 2.0% target. Although typically such a scenario would have the potential to send Sterling sharply higher, the overhang of political uncertainty has left the British Pound only marginally firmer against both the Euro (GBP/EUR) and the US Dollar (GBP/USD).
Inflation Data Holds Key to US Dollar’s Next Steps
Today’s US Consumer Price Index (CPI) inflation data for May will be closely watched by the Federal Reserve, ahead of its policy meeting next week. Following signs that the US economy is now feeling the effects of the global trade disputes, there’s concern that waning price pressures need to be addressed. Although CPI isn’t the Fed’s preferred measure of inflation, a shortfall in today’s print will have the potential to extend speculation as to just how quickly the Fed needs to act in order to stimulate the economy. Whether that’s next week or at a subsequent meeting is largely irrelevant, but the idea that rates in the US could be falling as pressure grows to tighten monetary policy in the UK has the potential to lend further support to the British Pound against the US Dollar (GBP/USD).
GBP/USD, EUR/USD and GBP/EUR Exchange Rate Movements
The British Pound gained around half a cent against the US Dollar (GBP/USD) yesterday on the back of better than expected wage inflation news from the UK. Upside has been limited by the ongoing political uncertainty that is currently gripping the UK. With little in the way of economic news due from Britain today, disappointing US inflation data could further boost the British Pound’s exchange rate against the Greenback (GBP/USD).
The Euro managed its fourth successive day of gains over the US Dollar (EUR/USD) on Tuesday, with the exchange rate holding close to levels not seen since late March as a result. Again, Eurozone economic data is in short supply today, although ECB members including its President, Mario Draghi, are due to make comments so further direction could emerge. Anything adding to the prospects of a US rate cut as soon as next week would also have the potential to see the Euro post further gains.
The Pound turned positive against the Euro (GBP/EUR) yesterday for only the third time this month, helped along by the better-than-expected UK wage data. However, despite the prospect of further divergence in Eurozone and UK interest rates, the political catharsis and Brexit uncertainty seem set to continue limiting gains for the British Pound, at least for now.
Why did it move? – Pound to Australian Dollar (GBP/AUD)
The British Pound is now trading at two-week highs against the Australian Dollar. The combination of better-than-expected UK economic data plus a sharp decline in Australian Consumer Confidence figure for June has fuelled gains for Sterling. Having started the week trading as low as 1.8110, the GBP/AUD exchange rate has now risen to 1.8320.