The Pound has begun Thursday’s trading on the back foot against the US Dollar (GBP/USD) and Euro (GBP/EUR). Investors will be watching for the Eurozone Gross Domestic Product (GDP) growth stat due out this morning after Germany escaped recession by a whisker. Eurozone employment data will also be out, as well as US Advance Retail Sales stats. Yesterday, the Euro to US Dollar (EUR/USD) currency pair noted it’s biggest one-day decline this year. Voting in parliament later today could create further GBP/EUR and GBP/USD exchange rate volatility. However, investors are expected to witness more significant volatility when another round of votes take place on February 27th.
(Above update provided at 09:30am 14/02/19).
The Pound to US Dollar (GBP/USD) exchange rate could feel the impact of UK and US inflation data today, after a positive day for Sterling yesterday. The British currency was bolstered by Bank of England (BoE) Governor Mark Carney with his somewhat optimistic outlook, and by reports from the Financial Times that Article 50 could be significantly extended.
Yesterday, reports emerged that the Chief Brexit negotiator, Ollie Robbins, was overheard discussing the Prime Minister’s tactics to avoid a no-deal scenario. The news helped to support the Pound along with comments from Mark Carney. Carney made several statements which could be taken as positive, a slight turnaround from the Bank of England Chief who has often been downbeat on Brexit and created some Pound exchange rate losses.
UK Inflation Falls – GBP/USD Exchange Rate in Tight Range
Today, UK inflation fell slightly below forecasts, keeping the GBP/USD exchange rate in a tight range. On the month, inflation contracted by -0.8% in January, a little lower than the -0.7% forecast and the previous +0.2% reading. On the year, inflation slipped from 2.1% to 1.8%, a two-year low, missing the 1.9% expectation. Meanwhile, the core measure held steady at 1.9% in January. The decline has been attributed to weaker energy costs.
Industry expert Nancy Curtin commented:
‘The sluggish UK economy is symptomatic of the wider picture. Central banks across the globe have taken their foot off the stimulus pedal and we are now seeing the results. With idiosyncratic issues in both the US and Europe slowing growth, Brexit affecting the UK, trade disputes, and a Chinese slowdown, we’re indisputably in a mid-cycle slowdown. A global recession seems a far-flung prospect, however in the UK Carney must be flexible and data-driven, putting decisive monetary policy on the back burner until greater political and economic clarity emerges.’
The US will also release its latest inflation reading today, which could offer the GBP/USD exchange rate some direction. The US Consumer Price Index (CPI) is forecast to fall from 1.9% to 1.5% on the year in January, while the core measure also experiences some softness with forecasts for a fall from 2.2% to 2.1%. Any decline further could create some USD exchange rate losses, and allow the Pound to climb against it.
US Inflation Falls Offering Federal Reserve Some Breathing Room
UPDATE: US inflation also dropped today, with the annual Consumer Price Index (CPI) coming in at 1.6% in January, down from the 1.9% seen the month before. The month alone managed to achieve 0.2% core growth, while the year remains at 2.2%. This offers some justification to the US Federal Reserve which has adopted a wait and see approach when it comes to monetary policy.
Meanwhile, in the Eurozone, political developments in Spain haven’t helped the Euro, with the parliament voting down 2019’s budget. This could breed political uncertainty and encourage early elections.
UK House prices have also noted a decline. Economic data out this morning has shown that the UK House Price Index has fallen from a negatively revised 2.7% in December on the year, to 2.5% as forecast. Meanwhile, Eurozone Industrial Production has recorded a surprising downturn, coming in at -4.2% on the year in December. The previous reading had been more favourable at -3.0%, and economists had expected a fall to -3.3%. The month of December alone noted a -0.9% drop.
Industry expert Bert Colijin of ING commented:
‘While the headline figure was much worse than anticipated, durable goods production increased in December and intermediate goods production was flat after a sharp decline in November. Out of the large economies, both Germany and France saw production increase, while Spain, Italy and the Netherlands contributed to the decline.’
US Mortgage Applications data for the week through Febraury 8th is up next.
Emerging Market Currencies Benefit from Weaker USD Exchange Rate; TRY/USD in Focus
Meanwhile, US Dollar softness on account of increased risk sentiment has been helpful to emerging markets such as the Turkish Lira. With a pause in US interest rate hikes, and a positive monetary policy adjustment from the European Central Bank (ECB) seemingly very far away, emerging markets have had some relief. In the year-to-date, the Turkish Lira has only gained 0.3% against the US Dollar, but some other currencies have made the most of the situation. The Russian Ruble is around 5.9% higher against the US Dollar (RUB/USD), while the South African Rand has gained around 4.2% against the Greenback (ZAR/USD).
Last year, the Turkish currency dropped by around 45% in six months, as politics and central bank actions converged. However, the lack of rebound has left some industry experts to suggest that the Turkish Lira is around 20% undervalued. Investors will be watching for rate cuts from the Turkish central bank with levels of inflation at over 20..00%, and the one-week repo rate at 24%.
The Pound to US Dollar (GBP/USD) exchange rate is trading at 1.2886, the Pound to Turkish Lira (GBP/TRY) exchange rate is trending at 6.7771. The US Dollar to Turkish Lira (USD/TRY) exchange rate is trading at 5.2565.