GBP/EUR – Weakening UK Inflation Weighs on Pound
August’s headline consumer price index showed greater easing than anticipated and left GBP exchange rates on the back foot, with annual inflation declining to 1.7%, less than the Bank of England’s (BoE) 2% target.
This weakening heightens the risk of a dovish tone from BoE policymakers and creates the potential for further Pound volatility.
The Pound could shed further ground if the Monetary Policy Committee (MPC) responds to lingering Brexit uncertainty and displays a greater sense of caution over the economic outlook.
GBP/USD – Pound Stumbles as EU Flags No-Deal Brexit Risk
Comments from European Commission President Jean-Claude Juncker saw the Pound fall sharply out of favour once again as both he and EU negotiator Michel Barnier warned that no-deal Brexit risks remain.
Given the recent lack of tangible progress surrounding negotiations, especially in regard to the Irish backstop, investors remain wary of the Pound.
However, the UK Supreme Court launches a three day hearing today in which the legality of Boris Johnson’s prorogation of parliament will come under scrutiny.
The GBP/USD exchange rate could gain a foothold if the verdict goes against the government, with any reduction in the risk of a no-deal scenario offering the Pound a potential rallying point.
USD/GBP – US Dollar Braces for Federal Reserve Rate Cut
A general increase in market risk aversion triggered by escalating tensions in the Middle East helped to shore up the US Dollar following the weekend’s explosive drone attack on Saudi oil fields.
This limited the impact of an unexpectedly weak consumer price index pointing towards easing inflationary pressure.
As markets had already largely priced in the impact of a Federal Reserve rate cut, USD exchange rates remained on a positive footing ahead of the September meeting.
However, if Fed policymakers express a more dovish outlook this could see the US Dollar fall sharply out of favour as further rate cuts become more likely.
On the other hand, should the Fed signal an intention to leave interest rates on hold for the remainder of the year this may encourage USD exchange rates to gain fresh ground.
EUR/USD – Euro Bounces Back as ECB Easing Falls Short of Expectations
Although the Euro dipped in the wake of the European Central Bank’s (ECB) policy announcement the decline was short-lived.
The central bank’s decision to reboot its quantitative easing programme and cut the overnight deposit rate was considered less dovish than expected.
A solid improvement in September’s ZEW economic sentiment indexes encouraged the single currency to trend higher, even though the indexes remained in negative territory.
Fresh comments from ECB policymakers may fuel a fresh sell-off for the Euro, however, if they demonstrate a greater willingness to loosen monetary policy in the coming months.
Another weak reading from the Eurozone consumer confidence index could put additional pressure on EUR exchange rates in the meantime.