December 4, 2018 - Written by Frank Davies
STORY LINK Pound Euro Exchange Rate Falls Back in Spite of Solid UK Construction PMI
November’s solid UK construction PMI was not enough to keep the Pound Sterling to Euro (GBP/EUR) exchange rate on a stronger footing for long.
Even though the headline PMI showed an improvement on the month, with business confidence lifting away from its recent multi-month lows, the Pound struggled to hold onto a sense of bullishness.
Underlying signs still point towards a level of weakness within the UK economy, leaving GBP exchange rates exposed to downside pressure amid the pervasive sense of Brexit-based uncertainty.
As October’s Eurozone producer price index data strengthened this offered support to the Euro, meanwhile, even as worries over the political outlook of the Eurozone persisted.
Brexit Uncertainty Limits Pound Sterling Euro (GBP/EUR) Exchange Rate Upside
As Bank of England (BoE) Governor Mark Carney defended the Bank’s recent Brexit analysis against MPs the mood towards the Pound deteriorated.
With investors increasingly concerned by the prospect of a hard or no-deal Brexit the GBP/EUR exchange rate gave up its early gains, returning to a narrow downtrend on Tuesday afternoon.
Further pressure could be in store for the Pound on Wednesday, however, with the release of November’s services PMI.
Reaction to the service sector data is likely to prove significant, given the high percentage of the gross domestic product which the sector accounts for.
Any evidence of slowing growth in services could drag the Pound lower across the board, especially if business sentiment diminishes.
If the UK looks set to see a weaker bout of growth in the fourth quarter the appeal of the Pound is likely to prove limited, encouraging investors to sell out of Sterling.
On the other hand, a more robust reading from the services PMI could prompt the GBP/EUR exchange rate to push higher once again.
Political developments could overshadow even a strong PMI, however, as MPs debate Theresa May’s Brexit proposal.
Signs that the majority of MPs are likely to oppose the agreement would weigh heavily on demand for the Pound, with markets still wary of the UK potentially leaving the EU without any deal.
Unless investors are given reason to bet on the prospect of the deal being approved the GBP/EUR exchange rate may struggle to return to an uptrend.
Euro (EUR) Exchange Rates Remain Vulnerable to Eurozone Political Tensions
Although the Euro found a rallying point on Tuesday its strength could prove short-lived, given the political tensions that remain within the currency union.
The single currency remains generally biased to the downside, as Jane Foley, Senior FX Strategist at Rabobank, commented:
‘We would link this with the poor tone of many recent Eurozone data releases in addition to the political pressures currently evident in both Italy and France.
‘Without reform the French economy is less attractive to investors. Without popular support, Macron may not be able to extend his programme of increasing integration across the EU, particularly given that Chancellor Merkel’s focus has been drawn back to domestic German politics in recent months. This is disappointing for investors.
‘The backdrop of political discontent and the rising threat of market unfriendly populism in Europe is likely to cloud the outlook for the EUR in 2019. The risks to the single currency would be accentuated if the recent bout of softer than expected economic data is continued.’
EUR exchange rates could come under pressure on Wednesday if the finalised raft of Eurozone services PMIs confirm a slowdown in growth.
The Italian services PMI may prove particularly discouraging, with any further contraction adding to concerns over the health of its economic outlook.
However, the Euro may find support on the back of October’s Eurozone retail sales figures, which are forecast to show an improvement.
An increase in consumer spending would encourage greater confidence in the outlook of the wider economy.
If the monthly sales figure rebounds from October’s stagnation this could see the GBP/EUR exchange rate extending its downtrend further.
Any disappointment, though, would leave the Euro exposed to selling pressure, particularly if the general sense of market risk appetite continues to fade.
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TAGS: Pound Euro Forecasts