Pound to Euro Rate Outlook: GBP Rangebound vs EUR amid Downbeat PMI Releases

May 23, 2023 - Written by John Cameron

STORY LINK Pound to Euro Rate Outlook: GBP Rangebound vs EUR amid Downbeat PMI Releases

The Pound Euro (GBP/EUR) exchange rate traded narrowly on Tuesday, as the latest set of PMI flashes for the UK disappointed investors.

At the time of writing, GBP/EUR traded at around €1.1494, showing little movement from Tuesday’s opening rates.

Pound (GBP) Exchange Rates Muted amid Downbeat PMI Data

The Pound (GBP) saw downbeat trade on Tuesday, as the latest set of private sector PMIs printed below forecasts.

For May’s activity, the manufacturing index printed at 46.9, below forecasts of 48. Similarly, the services index printed at 55.1, below a forecast of 55.5. Because of this, the Pound struggled to gain ground against its peers during the early European session.

Dr John Glen, Chief Economist at CIPS, commented: ‘Activity growth in private sector business softened last month to the lowest since March as subdued customer demand put a dampener on levels of new orders. Uncertainty returned as businesses were worried about higher interest rates impacting on business investment and consumers about their household bills. The dominant UK service sector however fared better than the manufacturing sector.’

However, the Pound could have been cushioned by upbeat news from the International Monetary Fund (IMF). The IMF upgraded their growth forecast for the UK, which could have brought some cheer to GBP investors.

Euro (EUR) Exchange Rates Mixed amid Tepid PMI Release

The Euro (EUR) saw mixed trade on Tuesday, as the latest set of Eurozone PMIs failed to provide much cheer for EUR investors.

While the figures declined less than forecast, they remained indicative of a slowdown in the manufacturing sector, which outweighed continued strength in the service sector. The manufacturing index for May printed at 44.6, down from 45.8.

Dr Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, commented: ‘Eurozone GDP is likely to have grown in the second quarter thanks to the healthy state of the services sector. However, the manufacturing sector is a powerful drag on the momentum of the economy as a whole. German companies from this sector are particularly hard on the brakes, as new orders here have fallen even more significantly than in France and the production index is also pointing sharply downward.’

Elsewhere, continued hawkish rhetoric from European Central Bank (ECB) policymakers may have provided some support. ECB Policymaker Pablo Hernandez de Cos commented that the ECB still had some ways to go to tackle inflation.

Pound Euro (GBP/EUR) Exchange Rate Forecast: UK CPI to Dent GBP?

Looking ahead for the Pound (GBP), Wednesday brings the publication of the latest consumer price index data, reflecting inflationary levels in April.

Headline inflation is forecast to cool sharply from 10.1% to 8.2%. This could weigh heavily on the Pound, by suggesting that inflation has firmly turned a corner in the UK. If it cools as much as is currently forecast, bets on further interest rate hikes from the Bank of England may diminish.

However, core inflation is forecast to hold at 6.2%. If this prints accurately, it may offset weakness from the headline inflation drop, by suggesting that inflation may be far stickier than initially thought.

For the Euro (EUR), the core catalyst of movement is likely to be Wednesday’s release of the latest Ifo business climate index for Germany.

The index is forecast to have fallen somewhat in May, from 93.6 to 93. If this prints in line with economist’s forecasts, it could dent the single currency by pointing to signs of decreased optimism in the bloc’s largest economy.

On Wednesday evening, European Central Bank President Christine Lagarde is scheduled to deliver a speech. If President Lagarde maintains the ECB’s hawkish demeanour, EUR could strengthen.

Elsewhere, market dynamics could weigh on the pairing. With talks over the US debt ceiling having to continue, this may weigh on the market mood. As the Pound is more risk sensitive, GBP/EUR could weaken.

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TAGS: Pound Euro Forecasts