GBP EUR Exchange Rates Climb on a Positive UK Services PMI

November 3, 2017 - Written by James Fuller

STORY LINK GBP EUR Exchange Rates Climb on a Positive UK Services PMI

The Pound Euro exchange rate tumbled yesterday as the market response to the perceivably dovish Bank of England (BoE) meeting minutes undermined news that the Monetary Policy Committee (MPC) voted for the first rate hike in a decade.

This changed on Friday, however, with a positive UK Markit services PMI shifting things back into the Pound’s favour.

BoE Rate Hike Undermined by Dovish Minutes – GBP EUR Initially Tumbles

The BoE voted 7 -2 to raise interest rates at their October policy meeting yesterday, with the final decision resulting in a 0.25 basis point hike (putting the baseline figure at 0.5%).

This was the first rate hike that the BoE has decided upon in almost a decade, and whilst this news would traditionally send the Pound soaring, any potential rally was quickly undermined by the overwhelming market response to the accompanying minutes.

Two elements within the statement proved significant, the first being reference to future rate hikes being ‘limited and gradual’ and the second being the removal of a line that had once referred to the Bank’s previous intention to push for a fast pace of monetary tightening.

Markets deemed this to be evidence of dovish sentiment and with the majority of economists and investors being primarily concerned with assessing the future monetary policy of the bank (rather than the somewhat small rate hike), it heavily weighed on GBP EUR, sending it tumbling some 2% before its recovery on Friday.

GBP EUR Exchange Rates Bolstered by Robust UK Service Sector Growth

The UK’s Markit service sector PMI jumped to 55.6 in October, beating September’s 53.6 print and the market forecast of 53.3. This reading marked the fastest expansion that the sector has seen in some six months, with improved domestic demand and various successful new product launches propelling new order growth.

Chris Williamson, chief business economist at IHS Markit, shared his thoughts on the readings:

‘The good news was that October saw business activity across services, manufacturing and construction grow at its fastest rate for six months. The data points to the economy growing at a quarterly rate of 0.5 per cent, representing an encouragingly solid start to the fourth quarter’.

With the services sector making up almost 80% of the UK’s GDP any indication into its strength is closely watched by markets, and following the recent run of better-than-expected PMIs for construction and manufacturing, today’s trifecta quickly propelled the Pound, allowing it to claw back some of its recent losses against the Euro.

GBP EUR Outlook Bolstered by Catalan Worries

The Euro’s appeal has mostly muted before the weekend, with today’s data calendar for the single currency being quite sparse.

Markets continue to remain somewhat anxious about the situation in Catalonia, however, with eight members of Catalonia’s previous secessionist administration being held in custody with the possibility of eventually facing a whole range of charges.

Deposed leader, Carles Puigdemont is currently refusing to return to Spain from his sanctuary in Brussels, though this could be short lived if Madrid is able to obtain a European arrest warrant.

Whilst the immediate threat of Catalan independence seems to have been quelled, the possibility that the proposed December election swings to favour independence remains, as does on-going civil strife within the region.

If Puigdemont is eventually jailed then the secessionist movement could clash even more with Spanish authorities, a prospect that would likely place the single currency under more pressure.

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TAGS: Pound Euro Forecasts