GBP: Macroeconomic & Geopolitical Drivers

The looming spectre of Brexit uncertainty continues to dominate the outlook for Pound Sterling. Lack of clarity on the thorny issue of UK-EU post-separation relationship is souring the GBP forecasts. Prime Minister Theresa May’s government is planning to publish a comprehensive White Paper on UK’s withdrawal from European Union following the EU Council meeting in late June but has so far refused to commit to a firm date, adding to the ambiguity and corresponding negative momentum for the Pound.

On the macroeconomic front, the Bank of England (BoE) is growing more hawkish, increasing the likelihood that the base rate will rise after the 2 August Monetary Policy Committee (MPC) meeting. The MPC’s hawkish outlook is supported by the Bank’s stated conviction that UK economy and price growth will improve later in the year.

An interest rate hike, which would be favourable for GBP FX pairs, would be predicated on better than expected UK economic data, including lower trade deficit and improved economic growth (i.e. GDP, consumer prices and retail sales).

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EUR: Macroeconomic & Geopolitical Drivers

Continental economies remain under strain, with the latest round of automotive US tariffs hurting German manufacturing exports to add further insult to injury of Eurozone’s economic slowdown in the first quarter of 2018. That being said, FX markets are eager for more signs of German economic recovery after strong 2.2% May price growth. EUR traders are hopeful that June consumer prices will maintain May’s uptrend and that price growth will also be reflected in strong economic statistics in August and September.

The European Central Bank (ECB) has also shown some faith in Eurozone economic recovery by deciding to end its quantitative easing programme by the end of the year. The crucial test will come at the end of Q3, however, when the ECB is planning to taper its stimulus package by half, but only if “incoming data [confirms] medium-term inflation outlook”. With that in mind, FX traders will be closely eyeing German and Eurozone inflation figures throughout the summer for signs of recovery and for potential for EUR to regain some strength.

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USD: Macroeconomic & Geopolitical Drivers

United States economy exhibited signs of resilience in 2018, with low unemployment, healthy jobs growth and improved labour productivity. Headline economic growth was more disappointing, with Q1 GDP falling to 2% quarterly growth rate from 2.9% in Q4 2017. Consumer prices, however, have grown steadily, with the core inflation metric rising in the second quarter to 2.2%, above the Federal Reserve’s (Fed’s) 2% inflation target. Economists will be looking to Q2 GDP figures in July and August for a return to stronger economic growth, with negative impact on the USD if economic data disappoints again.

US trade confrontations with key allies and critical trade partner China could provide additional hindrance to the US Dollar in the upcoming quarter. FX markets are increasingly worried that reciprocal trade barriers could hurt US manufacturers, further straining the US economy. The willingness of all sides to return to the negotiating table is seen as a crucial benchmark for USD (and EUR) strength in the coming months.

The Fed continues its policy of interest rate normalisation, with two more federal funds rate hikes expected this year. Critical for the Dollar will be whether both increases will come in Q3, or if only 26 September meeting will see a rate hike, with the fourth increase delayed until Q4 2018. Higher interest rates are seen as a signal of Fed’s faith in US economy and typically lead to a stronger currency.

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