The Pound tumbled against the Euro at the start of last week’s session as manufacturing and construction figures disappointed, however, a sturdy service sector print allowed Sterling to recover later in the week.
UK Private Sector PMIs In Focus
GBP/EUR slid by around half a cent last Monday as UK manufacturing came in at a four-month low of 54.2, down on expectations of 55.0. The report signalled that consumer goods producers were starting to lose out as a result of rising inflation. Across the Channel things were a little more optimistic: Eurozone unemployment printed at a seven-year low of 9.5% and the currency bloc’s manufacturing index struck a six-year high of 56.2.
The Pound to Euro exchange rate remained under pressure on Tuesday as British construction output slightly underwhelmed analysts’ predictions of 52.5 with a score of 52.2 and Eurozone retail sales accelerated from 1.5% to 1.8%.
Demand for the Pound picked up on Wednesday when the influential service sector PMI, which accounts for over 70% of UK GDP, printed at 55.0. The headline index surpassed forecasts of 53.5, but some analysts noted that signs of cooling in consumer-orientated sectors (such as hotels, restaurants and gyms) could spell bad news for the UK economy going forward.
Central Bankers Strike Dovish Tone
The single currency was the first to be hit by the dovish central banker brush, losing ground on Thursday as European Central Bank President Mario Draghi noted that despite ‘signs of progress’, it was ‘clearly too soon to declare success’ in the battle against stagnant price pressures. Draghi’s cautionary tone was seen to suggest that European monetary policy would remain accommodative through the remainder of 2017.
On Friday Bank of England Governor Mark Carney also avoided talk of tightening policy. The UK bank chief focussed on the tough task of creating banking stability following Britain’s exit from the European Union. He also spoke of the potential for a hard Brexit, which was to suggest that rates would remain low while the cloud of uncertainty hangs over the UK economy.
In addition to the Carney comments, Sterling was also hurt by a widening of the trade deficit, contractions in manufacturing and industrial data and a slowdown in UK GDP from 0.7% to 0.5%.
Week Ahead
Overall, GBP/EUR weakened by around half a cent last week. This week could see the Pound fight back if inflation and labour market figures impress.
The UK consumer price index is tipped to remain at 2.3% on Tuesday, however, further utility price hikes and rising food prices could drive the index higher. This would likely lead to a build in BoE rate hike bets, even though bank officials appear happy to let inflation rest above target for a little while. Also on the agenda is a British labour market report, which is expected to see unemployment remain at 4.7% and wage growth hold steady at 2.2%. With consumer prices rising, a surprise jump in average earnings could certainly boost UK economic prospects.
In Europe, attention will be turned to the French Presidential elections, where polls put far-right anti-EU candidate Marine Le Pen in joint lead with centrist independent Emmanuel Macron, with 24% of the vote apiece. Far-left candidate Jean-Luc Melenchon, who is also campaigning to leave the EU, is currently in third place with 18% of support. The Euro is liable to come under selling pressure if support increases for either of the anti-EU candidates.