Solid Eurozone Growth Dents GBP EUR Exchange Rate

October 24, 2017 - Written by David Woodsmith

STORY LINK Solid Eurozone Growth Dents GBP EUR Exchange Rate

Even though the latest raft of Eurozone manufacturing and services PMIs proved somewhat mixed this was not enough to keep the Pound Euro exchange rate on a stronger footing.

While the German service sector showed a larger dip in activity than forecast in October the Eurozone’s powerhouse economy still demonstrated general resilience.

This bolstered confidence in the outlook of the single currency, especially as the French economy showed unexpected improvement on the month.

As Bert Colijn, Senior Economist at ING, noted:

‘The weak headline for the October PMI should not worry the ECB too much as businesses indicate the fastest job growth since the survey started in 1997 and selling prices increased at the fastest pace since June 2011. While the drop in the composite PMI could point to a somewhat slower GDP growth in the last quarter of the year, it does seem that growth will remain healthy and that the economy could weather slower asset purchases by the ECB. With new orders increasing and export demand picking up, the underlying detail provided enough encouragement for another robust start to the quarter.’

The mood towards the Pound, meanwhile, deteriorated as the Conservative government continued to send mixed signals on the subject of Brexit.

As Theresa May reiterated the belief that ‘no deal is better than a bad deal’ this also weighed on Sterling, stoking fresh worries over the likelihood of Brexit negotiations proceeding smoothly in the coming months.

Weaker UK GDP Could Weigh on GBP Rates

Comments from Bank of England (BoE) deputy governor Jon Cunliffe added to the bearish mood of the Pound on Tuesday morning, with the policymaker taking a less hawkish tone.

Investors were discouraged by Cunliffe’s apparent ambivalence over the prospect of a November interest rate hike, particularly as other members of the Monetary Policy Committee (MPC) have expressed similar misgivings in recent days.

As markets have already priced in relatively high odds of imminent BoE action this naturally left GBP exchange rates on a weaker footing.

Further weakness could be in store for the Pound if Wednesday’s gross domestic product data proves disappointing, considering that some policymakers are already cooling to the idea of a rate hike.

Unless growth holds steady at 0.3% on the quarter then the GBP EUR exchange rate could lose further ground, given that the domestic outlook already looks rather bearish.

On the other hand, if the economy demonstrates greater resilience then this could keep the BoE on track to return to a monetary tightening bias.

While recent economic data has been largely disappointing any signs that the economy is still shrugging off Brexit-based uncertainty and stagnant wage growth could offer the Pound a strong rallying point.

Euro Volatility Forecast on ECB Meeting Outcome

However, the Euro may struggle to hold onto its gains for long as markets brace for the European Central Bank’s (ECB) October policy meeting.

Investors are expecting the ECB to finally announce that it is beginning to taper its quantitative easing program, something which could bolster the appeal of the single currency.

As strategists at UOB Group noted:

‘Expectations of ECB tapering appear to be the main factor supporting the EUR for now. Although an interest rate increase is certainly not expected from the central bank this Thursday (26 October), we are expecting an announcement of tapering plans of its asset-purchase program (APP) in the form of slowing its asset purchases gradually (which is currently at a pace of EUR60bn per month) in January 2018 after the current program expires in December 2017.

‘The key questions remain as to the specific magnitude of that reduction as well as the planned duration of the asset purchase program, with the option between a slower pace of buying for a longer horizon, or a shorter period of higher purchases.

‘Overall, we still expect the ECB to maintain a considerable degree of monetary accommodation for inflation dynamics to become durable and self-sustaining.’

Even so, if ECB President Mario Draghi maintains a generally dovish tone on monetary policy then any Euro upside could still prove limited.

Signs that the central bank is likely to adopt a more cautious outlook in the coming months may give the GBP EUR exchange rate a fresh boost.

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TAGS: Pound Euro Forecasts