After an unexpectedly sharp widening of the UK trade deficit the mood towards the Pound has soured somewhat, with the domestic outlook still looking decidedly unclear.
This suggests that the UK economy remains vulnerable to any future deterioration in trade conditions, with the post-referendum fall of Sterling still failing to translate into higher export volumes.
The data also highlighted the economy’s continued reliance on trade with the EU, raising concerns over the potential downside risk from a hard Brexit or lack of transition deal.
Confidence in the Pound could weaken further if Thursday’s RICS house price balance points towards a fresh loss of momentum within the UK housing market.
However, market focus is likely to primarily fall on the Bank of England’s (BoE) third quarter credit conditions survey.
If the report highlights greater concern over the strength of the economic outlook and the increased reliance on credit amongst households then the odds of an imminent BoE interest rate hike could weaken.
On the other hand, a more upbeat tone could encourage bets that the central bank is on course to raise interest rates before the end of the year.
The upside potential of the Pound Euro exchange rate is likely to remain limited either way, though, as investors await the outcome of the latest round of Brexit talks.
Unless there are signs of the two sides making significant progress towards an agreement the Pound could come under increased pressure.
Easing in Catalan Independence Tensions Supports Euro
As Catalonia’s president Carles Puigdemont backed away from a unilateral declaration of independence this offered support to the Euro on Wednesday morning.
Markets were relieved as Puigdemont signalled a willingness to enter dialogue with the Spanish government, even though the reaction from Madrid itself was somewhat lacklustre.
With the crisis appearing to have eased a little the GBP EUR exchange rate trended lower, as investors piled back into the single currency once again.
Even so, as analysts at ING noted:
‘Politics will likely overshadow ECB policy for EUR markets this week as media reports suggest that a swift resolution over Catalan independence looks unlikely at this stage. There will be some focus on President Draghi’s speech (Thursday), with investors still looking for hints over the central bank’s taper options ahead of the Oct ECB meeting. Any signal that QE tapering will remain in place “for longer” could keep EUR upside in check for now.’
If European Central Bank (ECB) policymakers offer a generally more optimistic tone this week then the mood towards the Euro is likely to improve.
However, if the latest Eurozone industrial production figures disappoint then the GBP EUR exchange rate could find some measure of support ahead of the weekend.