Sterling saw some respite from Brexit-related selling yesterday with the Pound US Dollar (GBP/USD) exchange rate jumping briefly before being knocked back by a less dovish than expected Federal Reserve. Gains for the Pound Euro (GBP/EUR) currency pair, however, proved sustainable as Eurozone data offered fresh cause for concern, while the combined effects of this news were sufficient to send EUR/USD tumbling to lows not seen since May 2017.
Reserved Federal Reserve Surprises Market Supporting USD
The British Pound US Dollar exchange rate (GBP/USD) had time to catch its breath yesterday, posting some modest gains as many in the market appeared to think that the latest Brexit risks were now priced in. That’s not to say this is the end of the selling, but with meaningful progress from the European Union unlikely until their politicians return from the summer break in mid-August, some upside was seen. However, gains for cable proved to be short-lived, as the Federal Reserve showed a higher-than-expected degree of caution over the prospect of further rate cuts. Having delivered a widely expected quarter-point reduction in borrowing costs last night, Jerome Powell was quick to stress this wasn’t the start of a long series of rate cuts. That attracted the ire of the White House and bolstered the already strong US Dollar, too.
Euro Data Disappointment Supports Sterling (GBP/EUR)
Gains for the British Pound Euro exchange rate (GBP/EUR) were rather more sustainable, with the latest economic data from the Eurozone providing little cheer. Unemployment for the currency bloc has held flat while Q2 Gross Domestic Product (GDP) growth estimates nudged up a shade, but with the Core Consumer Price Index (CPI) inflation reading now below 1.0%, there’s mounting concern that the European Central Bank (ECB) isn’t acting quickly enough when it comes to policy easing.
Bank of England’s (BOE) Inflation Report May Lift Pound (GBP)
The Bank of England will be in focus today with both its latest monetary policy statement and the publication of the quarterly inflation report. Mark Carney will likely talk up no-deal Brexit risks once again, but it could well be inflation projections that stand to provide the most influence for Sterling. Anything that hints at the UK being forced into a series of quick interest rate hikes later this year to control price pressures as a result of exchange rate weakness stands to drive at least some popularity for the Pound. It could yet prove to be short-lived, but as was seen yesterday with the Pound US Dollar rate (GBP/USD) quickly adding, then losing, a full cent, the potential quantum of any such move shouldn’t be underestimated.
Why Did it Move? Euro to US Dollar (EUR/USD) Exchange Rate
The Euro US Dollar exchange rate hit 26-month lows overnight. This was a result of the Federal Reserve taking a more conservative approach than many had expected over interest rate policy, combined with yet more downbeat economic data emerging from the Eurozone. German GDP growth disappointed too, leading to heightened concerns that the European Central Bank will need to take some significant action after the summer in a bid to right the economy. Having traded as high as 1.1165 yesterday, EUR/USD now sits at 1.1040.