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GBP/EUR, GBP/USD Boosted; Major Downside Risks Seem Spent

February 9, 2017 - Written by Frank Davies

The British Pound to Euro exchange rate trended relatively flatly on Friday, while the British Pound to US Dollar exchange rate slipped by around -0.2%.

Despite impressive UK trade data and a strong GDP estimate from NIESR, the Pound performed limply throughout the day. The US Dollar failed to capitalise however, as Michigan University’s preliminary February confidence report fell further than expected.

[Previously Updated 10/02/2017]

Stronger-than-expected UK production and trade data saw the GBP/EUR exchange rate trending higher at 1.1744 and the GBP/USD exchange rate trading in the region of 1.2505 on Friday morning.

While the US Dollar has been supported by the latest comments from the new administration regarding tax changes expectations are not positive for the afternoon’s University of Michigan Confidence Index results.

[Previously updated 09/02/2017]

GBP Bullish Versus EUR, USD; Pound Appealing as Overseas Political Concerns Roil Markets

Once again, the fact that the largest risk to the Pound - the vote for Brexit - is well in the past has made GBP an appealing buy today.

Traders are running from political risk, weakening the commodity markets, EUR and USD.

The Pound, having already been battered by the referendum and the passage of the Article 50 bill unaltered through Parliament, offers fewer downside risks and uncertainty in the short-term.

Additionally, the fact the latest RICS house price balance improved from 23% to 25% in January, instead of falling as forecast to 22%, is helping improve sentiment.

Recent hawkish comments from Bank of England (BoE) policymaker Kristin Forbes on the potential need for a near-term rate hike are also improving Sterling appetite.

EUR Weakens as Strong German Trade Figures Raise Tensions

Compared to the current market fears surrounding Greece, today’s German data has unsettled the markets for the opposite reason. Did trade perform too well over the course of last year?

Initially, the data seems disappointing. The final month of 2016 saw worse-than-expected trade figures for Germany, with the balance of trade weakening from €22.7 billion to €18.7 billion; nearly -€2 billion lower than expected.

But the overall picture for 2016 is much stronger. Germany saw a record annual trade surplus, with 1.2% growth in exports of €1.2 trillion. The slower pace of import growth of 0.6%, to €954 billion, pushed the annual trade surplus up to €253 billion.

However, the data has not been interpreted positively. A sluggish pace of imports could indicate that investment remains lower - something that has been fuelling tensions between Germany and other Eurozone members and, more recently, the US administration. DIW Economic Institute head Marcel Fratzscher commented;

‘The fact that the German economy is exporting much more than it imports is a source of concern and no reason to be proud. The record surplus will continue to fuel conflict with the U.S. and within the European Union.’

USD Weakens as Traders Begin to Tire of Waiting for Trump’s Economic Stimulus

A US Dollar crash had been predicted in November should Donald Trump win the election. In actuality, USD surged.

This was because investors realised that the billionaire Republican’s plans for fiscal stimulus and infrastructure investment could significantly raise inflation and prompt the Federal Reserve to hike interest rates faster than originally expected.

However, after nearly three weeks of overlooking controversial policy decisions, political faux-pas, a botched military operation in Yemen and a bitter divide in the US senate, investors are beginning to wonder whether Trump will actually get around to deploying his stimulus measures.

As Michael Hewson, CMC Markets Chief Market Analyst, explains;

‘US investors appear reluctant to throw in the towel on the Trump reflation trade quite yet, but there are signs of doubt as to whether it will actually arrive, so distracted does the new President appear to be with taking on his opponents.’

This has caused USD exchange rates to weaken.

GBP/EUR, GBP/USD Exchange Rates; Volatility Forecast on Central Bank Speeches

Bank of England Governor Mark Carney is set to give a speech in London this evening. He is unlikely to take the same tone as Kristin Forbes, which could soften the Pound as investors reassess their bets of a rate hike.
The near future will also see speeches from US policymakers. If James Bullard and Charles Evans were to echo fellow Fed President Patrick Harker and call for a rate hike in March, the US Dollar could reverse its losses.
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