Even though October’s public sector net borrowing figure bettered expectations this failed to offer the Pound any particular support ahead of the Autumn Statement.
- Lower level of government borrowing in October not enough to boost Pound – Government still on track to overshoot 2016-2017 fiscal target
- ECB easing speculation continued to drag on EUR demand – Single currency remained under pressure from political risk factor
- US Dollar dented by prospect of Trump TPP withdrawal – Signs of protectionist policy outlook prompted fresh market concerns
- Autumn Statement forecast to encourage Sterling volatility – Less fiscal stimulus likely to weaken GBP exchange rates
Stronger Eurozone Consumer Confidence Weighed on GBP EUR Exchange Rate
The Euro (EUR) was offered support by a better-than-expected uptick in Eurozone consumer confidence, which recovered from -8 to -6.1 in November. This indicated a strengthening in domestic optimism, in spite of developments in the global political landscape. As a result, the GBP EUR exchange rate trended lower in the region of 1.17, while the GBP USD pairing was slumped around 1.24.
(Previously updated at 10:35 on 22/11/16)
Confidence in the US Dollar faltered somewhat in response to Donald Trump’s indication that he will pull the US out of the Trans Pacific Partnership, a prospect that has not encouraged investors.
Narrowed UK Borrowing Failed to Boost Pound (GBP) Exchange Rate Outlook
Demand for the Pound (GBP) was limited ahead of Wednesday’s Autumn Statement, particularly as Chancellor Philip Hammond looks set to deliver less in the way of fiscal stimulus than markets had initially hoped for. However, Sterling was offered something of a boost at the start of the week by comments from Prime Minister Theresa May. In a speech at the CBI conference May noted that the UK was likely to seek an interim deal in order to minimise the impact in the immediate wake of Brexit. This eased worries over the uncertainty that could follow the act of departure, particularly if trade talks are still ongoing after two years.
Despite UK public sector net borrowing bettering expectations in October, with the deficit narrowing from -9.2 billion to -4.3 billion, GBP exchange rates generally weakened on Tuesday morning. While this result was more positive than forecast the government remains on track to overshoot its borrowing target for the 2016-2017 fiscal year. This could nevertheless offer Chancellor Hammond a boost heading into the Autumn Statement, but is unlikely to make a major impact to the budget.
Prospect of Further ECB Easing Boosted GBP EUR Exchange Rate
Comments from European Central Bank (ECB) President Mario Draghi did not do much to boost the Euro (EUR) on Monday, despite some easing in domestic political worries. The policymaker added further support to speculation that the central bank’s quantitative easing program will be extended in December. This prospect of further policy easing overshadowed the initial investor relief stemming from German Chancellor Angela Merkel’s announcement that she will run for another term in office. Although this, and the latest developments in the French presidential election, suggested that the rise of populism may not be entirely inevitable the Pound Euro (GBP EUR) exchange rate nevertheless trended higher.
The single currency could find a rallying point on Tuesday afternoon, however, with the publication of November’s Eurozone consumer confidence index. Expectations are for a modest uptick in sentiment, indicating that recent global uncertainty has not had a particularly detrimental impact on the domestic outlook. Even so, the Euro is likely to remain under pressure from political worries, with polls pointing towards a defeat for Italian Prime Minister Matteo Renzi in a referendum over constitutional reforms.
Already-High Pricing of 2016 Fed Rate Hike Limited US Dollar (USD) Upside Potential
Sentiment towards the US Dollar (USD) eased at the start of the week, with market optimism over the prospect of a Trump presidency beginning to temper. Given that investors have already priced in a high probability of the Federal Reserve raising interest rates before the end of the year the upside potential of the ‘Greenback’ has been limited. As Trump restated his intention to pull the US out of the Trans Pacific Partnership market fears of a greater turn towards protectionism were boosted, although this failed to particularly shore up the Pound US Dollar (GBP USD) exchange rate.
Hopes are not especially high for October’s existing home sales data, which is forecast to have held steady on the month. Any signs of weakening within the US housing market could raise concerns over the robustness of the wider economy, although even a downside surprise here seems unlikely to alter the outlook of the Fed. While the US Dollar may struggle to make particular gains in the near future investors could be encouraged by the tone of the November Fed meeting minutes, which could lend further support to the idea of an imminent rate hike. As researchers at RBC Capital Markets noted, though;
‘We generally agree with the positive USD outlook, although in our view there are some pairs where it has overshot and some where it has not moved far enough.’
Current Interbank Exchange Rates
At the time of writing, the Pound Euro (GBP EUR) exchange rate was slumped around 1.17, while the Pound US Dollar (GBP USD) pairing was trending narrowly in the region of 1.24.
