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Pound to Euro Exchange Rate Backs Off Recent Best Levels as UK Manufacturing Sector Slows

March 1, 2019 - Written by Frank Davies

Foreign exchange markets saw the Pound Sterling back off recent best exchange rate levels on Friday, with 1 GBP/EUR concluding the week valued at €1.16201.

"The Pound Sterling (GBP) continued to drift lower against the Euro (EUR/€) and US Dollar (USD/$) through Friday’s session but remained set to see out the week 1%+ up against all major peers following the early-week rally." said analysts at Exchange Rates UK.

Pound Sterling Euro (GBP/EUR) Exchange Rate Loses Ground as UK Manufacturing PMI Slows

The Pound Sterling to Euro (GBP/EUR) exchange rate continued to slip further from its recent 21-month high as February’s UK manufacturing PMI showed a fresh loss of momentum within the sector.

Although forecasts had pointed towards the index easing from 52.6 to 52.0 on the month the report still left the Pound on a generally weaker footing on Friday.

As Rob Dobson, Director at IHS Markit, commented:

‘Official data confirm that manufacturing is already in recession, and the February PMI offers little evidence that any short-lived boost to output from stock-building is sufficient to claw the sector back into growth territory.

‘Apart from the uncertain outlook, manufacturers also face a darkening backdrop of a domestic market slowdown and weakening inflows of new export business, as global growth decelerates and trade tensions bite. Manufacturing and the broader UK economy therefore face a difficult 2019, with the slowdown being exacerbated later in the year as inventory positions are unwound and Brexit-related headwinds likely to linger.’

With the UK economy continuing to show signs of weakness in the face of persistent Brexit-based uncertainty, in spite of elevated stockpiling activity, the mood of GBP exchange rates naturally soured.

Eurozone Manufacturing Sector Contraction Limits GBP/EUR Exchange Rate Downside

Even so, the Euro struggled to capitalise on the Pound’s softness ahead of the weekend as the latest raft of Eurozone manufacturing PMIs proved underwhelming.

Investors were disappointed to find that the Eurozone manufacturing sector fell into contraction for the first time in more than five years, with the index slumping from 50.5 to 49.3.

This suggests that growth continued to weaken last month, raising the risk of another underwhelming gross domestic product reading for the first quarter.

With confidence in the outlook of the Eurozone economy remaining weak EUR exchange rates struggled to find traction against their rivals.

However, an unexpectedly sharp rebound in German retail sales still helped to limit the downside bias of the Euro.

Pound Sterling (GBP) Vulnerable Ahead of UK Services PMI

Demand for the Pound could weaken further next week, however, if February’s UK construction and services PMIs also show signs of weakness.

Any decline in the UK services PMI could weigh heavily on the GBP/EUR exchange rate, as the UK economy remains largely reliant on the strength of the service sector.

If the PMI falls into contraction territory the mood towards the Pound may sour dramatically.

As long as signs point towards the UK economy losing further momentum on the month in February GBP exchange rates are unlikely to return to a bullish footing.

Eurozone Retail Sales Rebound to Offer Euro (EUR) Exchange Rate Support

A strong showing from January’s Eurozone retail sales data could help to give the Euro an additional boost, meanwhile.

Even in the face of a slowdown in the manufacturing sector EUR exchange rates may still benefit from signs of increased consumer confidence.

An increase in domestic demand could offset some of the weakness prompted by deteriorating global trade, limiting the downside potential of the first quarter gross domestic product.

On the other hand, if sales fail to improve significantly the Euro could come under additional pressure as market worries over the outlook of the Eurozone economy escalate.
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