Pound hits six-month low against euro and US dollar
Written by Canarian Weekly Business
As the Conservative leadership contest narrowed down to the final two candidates, the mood towards the pound deteriorated, with the odds of a no-deal Brexit appearing to increase.
Meanwhile, the increasingly-dovish outlook of the Federal Reserve, coupled with underwhelming US data, left USD exchange rates on the back foot.
An uptick in the Eurozone, consumer-price index was not enough to shore up the euro, with markets pricing in higher odds of the European Central Bank (ECB) cutting interest rates, before the end of the year.
With both Boris Johnson and Jeremy Hunt refusing to rule out the prospect of the UK leaving the EU without a deal, GBP exchange rates have come under pressure. As Johnson has also threatened to prorogue Parliament, in order to push through a no-deal Brexit, investors are taking an increasingly-cautious view of the UK outlook.
June's UK manufacturing PMI put additional pressure on the pound, this week, as the index disappointed forecasts to fall from 49.4 to 48. This weaker showing highlights the negative impact Brexit-based uncertainty is having on the UK economy, raising concerns over the health of the second-quarter, gross-domestic product.
Demand for the US dollar generally weakened in the wake of the Fed's June policy meeting, which saw a marked shift in tone on the subject of interest rates. Hopes of a breakthrough in trade relations with China helped to rally USD exchange rates in the wake of the G20 summit, however, as the two sides agreed to restart formal talks.
Although inflation within Germany and the Eurozone, as a whole, showed signs of picking up, this was not enough to boost the euro against its rivals. As the latest set of Eurozone manufacturing PMIs remained in contraction territory, worries over the underlying strength of the economy helped to keep the single currency on a weaker footing.
The appeal of the pound could diminish further if June's UK services PMI also proves disappointing in nature. As the service sector still accounts for more than three quarters of the country's economic activity, any contraction here could weigh heavily on GBP exchange rates.
If the UK appears on track for a stagnant, second-quarter, gross-domestic product, the pound may struggle to find support against the euro or US dollar. Mounting anticipation, ahead of the election of the new Conservative leader, could also put GBP exchange rates under pressure.
Meanwhile, any signs of improvement in the latest, US, non-farm payrolls report may encourage the US dollar to recover further ground. While even an upside surprise in employment is unlikely to alter the odds of a Fed interest-rate cut, this could still offer USD exchange rates a temporary boost.
Deterioration in May's German trade data could see the euro fall further out of favour, on the other hand, as global tensions continue to weigh on trade. Another weak month of exports would raise the risk of the Eurozone's powerhouse economy, seeing a greater loss of momentum in the second quarter, exposing the euro to fresh selling pressure.
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