February 2, 2018 - Written by David Woodsmith
STORY LINK GBP EUR Exchange Rate Softens as UK Construction Sector Threatens to Stagnate
Ahead of the weekend the Pound Euro (GBP EUR) exchange rate struggled to find any particular traction, with Brexit-based jitters continuing to limit Sterling demand.
While Thursday’s UK manufacturing PMI was not overly encouraging on the surface, however, the Pound managed to largely shrug off any negative impact from the data.
With signs pointing towards an increase in domestic price pressures and faster export growth investors were still encouraged to bet on the prospect of the Bank of England (BoE) raising interest rates again in the near future.
However, as the corresponding construction PMI slumped sharply to just 50.2 the appeal of the Pound still diminished on Friday morning.
Pound Under Pressure as Odds of BoE Rate Hike Fluctuate on UK PMIs
The reading of 50.2 takes the UK construction sector perilously close to stagnation, driven by a wide decline in housebuilding.
This does not inspire particular confidence in the outlook of the wider economy, although construction only accounts for a small proportion of the gross domestic product.
Even so, as long as investors still see the potential for imminent BoE action the GBP EUR exchange rate should find some degree of support.
As James Knightley, Chief International Economist at ING, commented:
‘We have also recently seen some better housing data, employment, confidence numbers and of course the above consensus 4Q GDP outturn. Bank of England officials also seem quite keen to tighten policy further at some stage, but there hasn’t been enough to suggest that a hike next week is on the cards. However, if the BoE nudges up its forecasts a touch next week and sound open to further hikes, the current 40% market-implied probability of a May rate hike will rise.
‘A May BoE rate rise is increasingly looking a 50:50 call to us but for now, our House View remains that there won’t be a rate hike this year. The UK economy looks set to grow at half the rate of the US in 2018 and a full percentage point slower than the Eurozone. It should be doing much better given the global upturn in demand and the competitive Sterling exchange rate.’
However, if the January services PMI falls short of forecast on Monday the Pound may struggle to hold onto any positive momentum.
As the service sector remains the key driver of the UK economy a weaker showing here would give markets and policymakers cause for caution.
Solid Eurozone Manufacturing Sector Growth Supports Euro Exchange Rates
Thursday’s finalised raft of Eurozone manufacturing PMIs have limited the downside potential of the Euro, meanwhile.
Markets maintain a generally optimistic view of the currency union’s economic health, with the Eurozone looking set for another strong year of growth in 2018.
Naturally this encouraged hopes that the European Central Bank (ECB) will take a more hawkish policy stance over the coming months, with the long-running quantitative easing program being wound down sooner rather than later.
Particularly pertinent was the increase in price pressures shown within the report, which potentially points towards higher inflation in the months ahead.
As Chris Williamson, Chief Business Economist at IHS Markit, noted:
‘The hike in prices associated with the further shift to a sellers’ market for many goods was accompanied by a steep rising in oil prices during the month, resulting in a further intensification of cost pressures. With higher costs being increasingly passed on to customers, the survey sends a warning signal for a potential rise in future consumer price inflation.’
If this morning’s Eurozone producer price index figures show a similar acceleration this could dent the GBP EUR exchange rate, giving the ECB further incentive to consider returning to a monetary tightening bias.
However, if the latest US non-farm payrolls data proves bullish the Euro could well come under pressure from a stronger US Dollar.
With the Federal Reserve looking set to raise interest rates again in the near future any improvement in US wage growth could boost these odds further, weighing heavily on EUR exchange rates.
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TAGS: Pound Euro Forecasts