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Old 04-14-2018, 06:40 AM
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Default Canarian Weekly: UK PMIs limit GBP demand

UNDERWHELMING, UK, economic data has limited the appeal of the pound, although both the euro and US dollar have also come under pressure, in the last two weeks.

As a result, the GBP/EUR exchange rate has climbed from 1.1366 to 1.1495. The GBP/USD exchange rate struggled to regain any particular momentum, meanwhile, hitting a fortnightly low of 1.3967, ahead of the weekend.

There was little cause for confidence in the latest raft of UK PMIs, with the economy showing fresh signs of losing momentum. Investors were particularly concerned by the construction-sector’s return to a state of contraction, and a sharp drop in the services PMI.

Taken together, these weaker results suggest that the UK economy faltered during the first quarter, potentially signalling a fresh dip in the gross domestic product. This, naturally, put the pound under fresh pressure, with weaker domestic growth likely to discourage the Bank of England (BoE), as it weighs up the prospect of fresh, monetary tightening.

Confidence in the US dollar, meanwhile, has fluctuated in response to mounting trade tensions between the US and China. With both sides outlining prospective tariffs of $50 billion, the US dollar slipped, with markets concerned by the negative implications this could have for the world’s largest economy.

As the US unemployment rate also failed to fall from 4.1% to 4.0% for the second month running, this helped to boost the GBP/USD exchange rate, ahead of the weekend.

While German and Eurozone consumer-price-index figures failed to pick up as forecast in March, this limited the potential of the euro. As the European Central Bank (ECB) looks set to maintain a dovish bias for some time to come, the appeal of the single currency was, naturally, limited.

The NIESR gross-domestic-product estimate for the first quarter of 2018 could put further pressure on the pound. Any indication that the UK economy lost further momentum, in the first three months of the year, is likely to set GBP exchange rates on a fresh downtrend. Even so, the key source of pound volatility in the coming fortnight will be March’s UK consumer-price-index data.

If inflationary pressure is found to have picked up once again, this could fuel bets that the Bank of England (BoE) will raise interest rates sooner, rather than later, to the benefit of the pound. Investors will continue to watch commentary from ECB policymakers, meanwhile, hoping to see signs of a shift towards greater hawkishness.

Should Eurozone data continue to fall short of expectations in the coming days, though, EUR exchange rates could see further losses. Meanwhile, any escalation in tensions between the US and China could drive GBP/USD exchange-rate volatility.

Even if market risk appetite diminishes, this may not be enough to prevent the US dollar from softening, as confidence in the outlook of the US economy diminishes.

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