Italian political drama helps to shore up GBP EUR exchange rate

Italian political drama helps to shore up GBP EUR exchange rate

08/06/2018 14:00
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WEAKER-than-expected UK data has put the pound under fresh pressure, raising doubts over the likelihood of the Bank of England (BoE) tightening monetary policy, before the end of the year.
A volatile sense of market risk appetite helped to drag the GBP/USD exchange rate lower, hitting a seven-month low of 1.3218. On the other hand, the downside bias of the GBP/EUR exchange rate was limited, thanks to renewed political turmoil within the Eurozone.
As the UK consumer price index fell back in April, this left the pound on a weaker footing, undermining the prospect of any imminent BoE policy action. May’s UK manufacturing and construction PMIs also proved disappointing, with signs pointing towards business confidence continuing to decline, throughout the second quarter.
A lack of progress on key Brexit issues, such as the Irish-border question, also helped to push GBP exchange rates lower. Political concerns have weighed heavily on the euro in recent days, thanks to developments in Italy, as the populist Five Star Movement and League attempted to form a working coalition.
The alliance threatened to collapse when President Sergio Mattarella rejected the proposed Eurosceptic candidate for finance minister, leading the euro into a sharp slump. However, the threat of fresh elections soon diminished, as the two parties put forward a different candidate, and secured their place as the next government of Italy.
Better-than-expected German and Eurozone inflation data also gave investors cause for confidence, boosting hopes that the European Central Bank (ECB) could soon return to a more-hawkish outlook.
Global trade concerns have also picked up, thanks to the Trump administration’s choice to impose steel and aluminium tariffs on the Eurozone, Canada and Mexico. Even so, with market risk aversion limited, the US dollar struggled to gain any fresh momentum from these developments.
Nevertheless, after May’s labour market data showed a surprise fall in the unemployment rate, markets remain confident in the prospect of an imminent, Federal Reserve interest-rate hike.
Speculation over the likelihood of the BoE raising interest rates in August is likely to drive further volatility for pound exchange rates, in the weeks ahead. Particular focus will fall on the latest UK wage growth and inflation data, with any signs of a fresh decline in price pressures likely to dent the pound.
Worries over a potential clash between Italy’s new government and the EU, over budget restrictions, could see the euro come under fresh fire.    Although fears of a fresh Eurozone crisis have diminished since the resolution of the Italian deadlock, these could still flare up if tensions within the currency union start to mount, once again.
As markets widely expect the Federal Reserve to raise interest rates at its June policy meeting, the US dollar may struggle to find any particular strength on the back of the announcement.
However, if the Trump administration continues to pursue its more protectionist line of policy, this could help to boost USD exchange rates with a general deterioration in market risk appetite.
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