Pound (GBP) Sinks against US Dollar (USD) and Euro (EUR) after IMF Comments, US Inflation Ahead

Pound (GBP) Sinks against US Dollar (USD) and Euro (EUR) after IMF Comments, US Inflation Ahead

The Pound exchange rate has begun Wednesday trending lower against the US Dollar (GBP/USD) and Euro (GBP/EUR) after the International Monetary Fund (IMF) released it’s latest assesment of the UK and markets awaited US inflation numbers.

Today’s IMF report stated that the UK needed to up its productivity, stating:

‘Directors agreed that structural reforms should prioritise enhancing productivity, inclusiveness, and external competitiveness.’

The IMF defended it’s December health check findings which had been less than inspiring and went on to outline the UK economy and how Brexit has impacted it.

The IMF stated:

‘Economic growth has moderated since the beginning of 2017, reflecting weakening domestic demand. The sharp depreciation of sterling following the referendum has raised consumer price inflation, squeezing household real income and consumption. Business investment has been constrained. In the medium term, growth is projected to remain at around 1.5 percent under the baseline assumption of continued progress in Brexit negotiations that lead to an understanding on a broad free trade agreement and on the transition process.

‘The baseline outlook is subject to a number of risks, including developments with Brexit negotiations; uncertainty about the recovery of productivity growth, which has been weak since the crisis; and the current account deficit, which reached a record high in 2016.’

In other news, markets are eagerly awaiting the release of US inflation numbers which could create some significant US Dollar exchange rate movement. The Buck is likely to rise if an unexpected surge in consumer prices occurs. Markets will be watching the Consumer Price Index (CPI) reading in relation to the recent strong pick-up in wage growth and some believe that rising global inflation is happening at a pace that leaves central banks on the back foot.

Meanwhile, in the Eurozone, German growth came in at 2.9% in December on the year. down from 3.0% in the previous reading. However, with the possibility of political disruption in the Eurozone (as well as on a global scale) there could be volatile times ahead.

ING Economist Carten Brzeski said:

‘Obviously, there are also risks to this positive outlook for the German economy, just think of a protectionist wave coming from the US, a sharp appreciation of the euro or renewed political tensions, geopolitically, in the Eurozone or domestically. Interestingly, the last one has clearly moved up on the scale from “remote” to “clear possibility.”‘

Germany has experienced some recent disruption after last year’s election and prolonged negotiations between political parties to try and secure a deal, to prevent another snap election. Interestingly, in the Czech Republic political parties are beginning a debate on the laws surrounding referendums. Businesses are concrned that the discussion could lead to a referendum resulting in a ‘Czexit’. Meanwhile, Italy has its own elections in March which could pave the way for populist parties, mainly the Five Star Movement.

The GBP/USD exchange rate is trending at 1.3859.
The GBP/EUR exchange rate is trading at levels of 1.1215.

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