THE pound is recovering slightly, following two weeks of broad-based losses, but the chances of a full sterling recovery appears unlikely, as uncertainties surrounding Brexit and UK politics, in general, weigh heavily on the outlook.
Rising hopes about resilience in the Eurozone economy have led to major GBP/EUR losses, with the pair trending low at €1.14, despite this morning’s partial recovery. EUR/GBP is now trending at around £0.87.
GBP/USD has fallen far from the level of $1.30, and is currently trending in the region of $1.27. As the US dollar has benefited from safe-haven demand, it has gained against the euro, too, pushing EUR/USD down to trend near May’s worst levels of $1.11.
The pound has had a rough time, since the beginning of the month. With hopes fading of a soft Brexit being agreed in cross-party negotiations, investors have sold the British currency. Talks between the ruling Conservative Party and opposition Labour Party finally collapsed last week, and a lack of certainty over what comes next, has meant that no-deal Brexit fears have returned.
In recent weeks, Eurozone data has increasingly indicated that the bloc’s economy has performed better than expected this year, so far. However, as US-China, trade-war fears have also flared up again, there are fresh concerns that the Eurozone economy could be impacted.
This led to safe-haven demand, which caused a surge in US dollar strength, and allowed it to capitalise on a broadly-weak pound, as well as sustain its gains, versus the euro.
Politics will continue to take focus for the pound and euro for the next few weeks, as the EU elections take place from Thursday, and votes will be counted, throughout the weekend. Both currencies are likely to lose some appeal, if populist Eurosceptic parties perform well in the elections, as they will worsen concerns about the future of the EU project, as well as the sustainability of the Eurozone economy.
A poor performance for the UK’s ruling Conservative Party could be perceived as increasing the chances of a no-deal Brexit, as well as the likelihood that a hard-Brexit-supporting leader would take over from Theresa May, in the coming months.
With political uncertainties driving the pound and euro, the safe-haven, US dollar may remain appealing. Still, the US dollar’s potential for further gains on risk-sentiment may be limited, as data continues to paint a mixed picture for the economic outlook. If upcoming Federal Reserve news or domestic data disappoints investors, Fed interest rate cut bets could rise, and the US dollar may slump from its recent highs.
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