GBP/EUR – Shifting Odds of Brexit Deal Fuel Pound Volatility
Over the course of the last week the Pound has seesawed on the shifting odds of an imminent Brexit breakthrough.
GBP exchange rates surged to four-month highs after Boris Johnson and Irish Taoiseach Leo Varadkar issued a joint statement, with both leaders saying they could see a pathway to a possible deal.
However, discussions over the weekend failed to yield any tangible progress, leaving the Pound vulnerable to renewed selling pressure.
Speculation about the likelihood of a deal ahead of the latest European Council summit has fuelled further Sterling volatility thanks to mixed signals from both the EU and UK.
Unless the two sides can agree a deal before the end of the week, the Pound could reverse its recent uptrend.
GBP/USD – Surprise UK Growth Contraction Raises Recession Fears
While Brexit has been the main catalyst for GBP exchange rate movement in recent weeks, the UK’s gross domestic product figure for August also gave investors cause for concern.
Growth saw a surprise -0.1% contraction, stoking fears that Brexit uncertainty is having an even more damaging effect on the economy than previously thought.
September’s consumer price index also disappointed, with a steady headline inflation rate of 1.7% leaving the Bank of England (BoE) with little incentive to adopt a hawkish outlook.
Worries about the underlying health of the UK economy could pick up further on Thursday if retail sales weaken on the month as analysts expect.
USD/GBP – US-China Trade Progress Drags on US Dollar
Positive signals emerged from fresh US-China trade talks on Friday, creating a risk-on market and limiting the appeal of the US Dollar.
However, risk aversion increased and USD exchange rates returned to a positive footing as US-China tensions escalated over Washington legislation seeking to punish Hong Kong authorities for their treatment of street protestors.
However, a weakening of the US manufacturing sector could limit USD gains in the days ahead (even if demand for safe-haven currencies remains elevated) with an expected month of declining industrial and manufacturing production elevating the odds of a poor Q3 growth figure.
Meanwhile, divisions between Federal Reserve policymakers, sparked by mixed economic data, failed to reduce expectations for an imminent rate cut.
EUR/USD – Deteriorating Eurozone Production Drives Euro Weakness
Confidence in the Eurozone’s economic outlook continues to slide after August’s industrial production data missed forecasts.
With turbulent global trade conditions dragging on the bloc’s manufacturing sector, support for the Euro naturally weakened.
Although October’s ZEW economic sentiment indexes beat forecasts, they remained firmly within negative territory, dragging the single currency lower.
The unfolding Brexit situation could limit any potential for EUR gains in the coming days given the impact a no-deal outcome would have on Eurozone growth. Meanwhile, a predicted narrowing of August’s current account surplus could add to the single currency’s woes.