Easing Swiss Inflation Fails to Boost GBP/CHF Exchange Rate
Weaker-than-expected Swiss consumer price index figures failed to prevent the Pound Sterling to Swiss Franc (GBP/CHF) exchange rate losing fresh ground ahead of the weekend.
Although the headline inflation rate dipped on the year, easing from 0.6% to 0.3%, this was not enough to dent the Swiss Franc (CHF).
Even though weaker levels of inflation mean that Swiss interest rates are unlikely to move back towards positive territory any time soon CHF exchange rates benefitted from a general increase in market risk aversion.
As the Trump administration threatened to impose a fresh 10% tariff on the remaining $300 billion of Chinese goods not yet impacted by the trade dispute the mood of investors soured once again.
With the two sides appearing no closer to an agreement, in spite of the latest round of trade talks, the Swiss Franc was buoyed by a general movement into safe-haven assets.
This also helped to overshadow another disappointing month for the Swiss manufacturing sector, even as July’s PMI fell further into contraction territory.
Weak Construction Sector Performance Limits Pound Sterling Appeal
Demand for Pound Sterling (GBP), meanwhile, remained muted thanks to the underwhelming nature of the latest UK construction PMI.
While the construction sector only accounts for a small percentage of UK economic activity investors were still disappointed to find that the index had remained in a state of contraction at 45.3.
As Duncan Brock, Group Director at the Chartered Institute of Procurement and Supply, noted:
‘Moving into the second half of the year it will take the sector some time to dig its way out of this deep hole. As the autumn and the potential negative impacts of a no-deal exit from the EU threaten, any significant recovery is unlikely to be on the horizon until 2020.’
This suggests that the UK economy faces another potential quarter of lost momentum in the third quarter, raising the risk of a stagnant gross domestic product reading.
With the odds of a no-deal Brexit scenario still looking elevated, in spite of the Conservative Party’s working majority having fallen to just one, GBP exchange rates were left on the back foot.
GBP/CHF Exchange Rate Volatility Forecast on UK Services PMI
Further pressure could be in store for the GBP/CHF exchange rate on Monday with the release of the corresponding UK services PMI, as forecasts point towards another underwhelming reading.
Although the PMI is expected to hold steady at 50.2 on the month, maintaining a modest level of expansion, this could still expose the Pound to a fresh bout of selling pressure.
The service sector accounts for more than three quarters of the UK gross domestic product so a weaker reading here would have a more significant detrimental impact on GBP exchange rates.
On the other hand, if the sector delivers a stronger month of growth this may encourage the Pound to recover some of its recent losses.
However, even if the services PMI remains within expansion territory or shows an improvement on the month any fresh political turmoil could diminish any positive impact of the data.