Surprise UK Construction PMI Weakening Weighs on GBP EUR Exchange Rate

September 4, 2017 - Written by Frank Davies

STORY LINK Surprise UK Construction PMI Weakening Weighs on GBP EUR Exchange Rate

The mood towards the Pound soured further on Monday morning thanks to a disappointing UK construction PMI, prompting a fresh downtrend against the Euro.

Investors were not encouraged to find that activity in the construction sector had eased unexpectedly from 51.9 to 51.1 in August, contrary to expectations of a modest uptick on the month.

This suggests that the UK economy is not in such a robust state of health as markets have previously hoped, with the prospect of a significant third quarter rebound in growth now looking less likely.

As Tim Moore, Associate Director at IHS Markit, noted:

‘Survey respondents noted that subdued business investment and concerns about the UK economic outlook had led to a lack of new work to replace completed projects, especially in the commercial building sector.

‘There were signs that UK construction firms are bracing for the soft patch to continue into this autumn, with fragile business confidence contributing to weaker trends for job creation and input buying during August.’

Even so, as the construction sector only accounts for a small proportion of the UK gross domestic product the negative impact of this data was somewhat limited.

Anticipation Likely to Weigh on Euro Ahead of ECB Meeting

Confidence in the Euro, meanwhile, picked up even in the wake of somewhat disappointing Eurozone producer price index results.

However, while producer prices failed to recover as far as forecast on the month in July the lack of any fresh contraction offered investors some cause for confidence.

The single currency also benefited from the relative weakness of the US Dollar, which remained under pressure on the back of Friday’s unexpectedly soft non-farm payrolls report.

With no change forecast for tomorrow’s finalised raft of Eurozone services and composite PMIs this could keep the Euro on a generally stronger footing.

Nevertheless, the GBP EUR exchange rate may find some renewed support ahead of the European Central Bank’s (ECB) latest policy meeting on Thursday.

There are no real expectations for the ECB to make any particular changes at this juncture, especially as reports have suggested that any real discussion of the quantitative easing program is unlikely to come before December.

The Euro could falter, though, if ECB President Mario Draghi issues any fresh warnings over the relative strength of the single currency.

Analysts at Danske Bank commented:

‘The main focus at the ECB meeting is likely to be how big a problem the current pace of Euro appreciation is for the ECB. We expect Mario Draghi to express concern about this and explicitly mention that the stronger Euro is the main reason the ECB has lowered its inflation projection and that there is further downside risk. That said, Draghi will still have some hawkishness in his tone in our view. This is because growth momentum remains strong, which has previously been one of his arguments for why inflation will rise eventually. However, as Draghi said in July, a financial tightening is ‘the last thing’ the ECB needs.’

If signs point towards the ECB leaving monetary policy on hold for some months yet this could help to boost the GBP EUR exchange rate.

Pound Rally Possible on Stronger UK Services PMI

Increased volatility is likely for the Pound with the release of the UK services PMI tomorrow, given that the service sector accounts for more than three quarters of domestic economic activity.

A strong showing here could ease concerns over the current economic outlook, outweighing the impact of the weaker construction sector data.

On the other hand, if the services PMI also surprises to the downside this could put significant downside pressure on GBP exchange rates.

With worries over Brexit unlikely to ease any time soon any domestic political developments may prompt jitters for the Pound, particularly if the minority Conservative government fails to show any signs of softening its stance on key issues.

If markets see any indication that progress is being made towards some manner of positive agreement, though, this could help to limit the downside potential of Sterling.

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TAGS: Pound Euro Forecasts