GBP to EUR Exchange Rate Edges Higher Despite Solid Eurozone PMIs

November 6, 2017 - Written by Ben Hughes

STORY LINK GBP to EUR Exchange Rate Edges Higher Despite Solid Eurozone PMIs

Last week saw the British Pound to Euro exchange rate briefly advance on weak Eurozone inflation, before tumbling on the Bank of England’s (BoE) dovish interest rate hike. On Monday morning the pair climbed on hopes for development in the Brexit process.

Due to market surprise with the Bank of England’s (BoE) dovishness, the GBP/EUR exchange saw a high of 1.1446 and a low of 1.1192 last week. The pair opened this morning at the level of 1.1260 and trended nearer the level of 1.13 at the time of writing.

Pound (GBP) Trade Becomes Politics Focused Again

Sterling edged higher when markets opened on Monday, as investors looked ahead and hoped that Brexit negotiations would soon be optimistic enough to improve the long-term UK economic outlook. This would strengthen the Pound outlook too.

Last week’s Bank of England (BoE) interest rate hike didn’t improve the Pound’s long-term outlook much. In fact, many investors hoping for the bank to signal that more interest rate hikes were on the way were disappointed.

The bank indicated that future interest rate hikes would be very limited and gradual, essentially causing hopes of a rate hike cycle to evaporate.

Now that the BoE has hiked UK interest rates to 0.5% but the UK economic outlook remains filled with uncertainties, investors once again don’t have much reason to buy the Pound.

Many analysts believe that upcoming UK economic data will continue to weaken due to Brexit uncertainties and the UK pay squeeze. According to a note from Morgan Stanley;

‘We see further weakness in store for the Pound over the medium term as economic data weaken’

This is why investors are re-focusing on the Brexit process. While UK-EU negotiations have reached a perceived standstill in recent months, EU chief negotiator Michel Barnier has stated he believes negotiations will speed up soon.

Many EU officials have indicated that the first phase of UK-EU talks are nearing an end and that they are preparing for preliminary UK-EU trade talks that are set to be a part of the second phase.

Anticipation for UK-EU trade negotiations to begin, as well as attempts from UK Prime Minister Theresa May to reassure businesses on Brexit, left Sterling more buoyant on Monday.

Euro (EUR) Slips despite Strong October PMIs

Demand for the Euro has been limp since the most recent Consumer Price Index (CPI) results indicated that inflation was likely to slow considerably in 2018, as the European Central Bank (ECB) forecast.

The Euro has been gradually sold from its highs in recent weeks due to diminishing bullishness about the ECB outlook, though the Eurozone bloc is still showing solid economic recovery overall.

Monday saw the publication of October’s final services and composite PMI figures from Markit.

Despite the mixed manufacturing results last week, the services data was solid enough to strengthen the overall composite PMI.

The Eurozone’s final October composite PMI was projected to slip from 56.7 to 55.9, but instead only dropped to 56.

This indicated that the Eurozone had seen stronger economic activity than expected once again in October. However, it did little to improve market demand for the Euro.

GBP/EUR Forecast: Brexit Developments in Focus

UK data is unlikely to drive Pound trade much in the coming days, due to a lack of highly influential data due until later in the month.

Halifax house price data will come in on Tuesday, followed by some relatively influential UK trade and production data on Friday.

Instead, any developments or discussions on the Brexit process have stronger potential to influence the Pound. If negotiators from the UK or EU show signs that talks are speeding up, or that trade discussions could begin within the coming weeks, Sterling is likely to surge.

As for the Euro, Eurozone data has the potential to influence the shared currency.

Tuesday will see the publication of September’s Eurozone retail sales results and Markit’s October retail PMI for the bloc. Towards the end of the week, German trade stats and production data from various Eurozone members will be published too.

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TAGS: Pound Euro Forecasts