GBP/EUR – Solid Services PMI Could Extend Pound Gains
July’s UK manufacturing PMI surprised to the upside, strengthening from 54.2 to 55.1 as the sector continued to demonstrate robust growth. This offered the Pound a fresh rallying point, even though the corresponding construction PMI proved distinctly disappointing.
As NIESR adopted a more optimistic outlook in its latest forecasts, estimating growth of 1.9% for the UK in 2018, this added to the bullishness of Sterling.
However, the mood towards the Pound could significantly sour if July’s services PMI fails to impress. Given that the service sector is responsible for more than three quarters of UK economic activity, any disappointment here could see the GBP/EUR exchange rate slump sharply.
GBP/USD – No Change Forecast for August BoE Meeting
The mixed nature of recent UK data has limited the likelihood of the Bank of England (BoE) shifting to a more hawkish stance at its August policy meeting.
Expectations still point towards the majority of policymakers voting for interest rates to remain on hold for the time being, limiting the upside potential of the Pound.
Any signs that the balance of the Monetary Policy Committee (MPC) is moving towards the hawks, however, could see GBP exchange rates pushing towards fresh highs on Thursday.
Attention will also fall on the latest quarterly Inflation Report, with any downwards revisions to the BoE’s forecasts likely to dent the appeal of Sterling.
USD/GBP – Dollar Could Recover if Labour Market Tightens Further
As the Federal Reserve sounded a relatively dovish note on inflation at its July policy meeting the US Dollar came under renewed pressure.
While market risk appetite generally declined in response to mounting geopolitical tensions, the ‘Greenback’ struggled to particularly capitalise on its position as a safe-haven asset.
Developments in the Trump White House gave investors little cause for confidence in USD exchange rates, with promised tax reforms and infrastructure investment looking increasingly distant.
If July’s non-farm payrolls report points towards a continued tightening of the US labour market, though, this could offer the US Dollar a rallying point. However, if wage growth remains lacklustre any bullishness could be tempered by declining Fed rate hike bets.
EUR/USD – Rising German Inflation Supported EUR
Confidence in the Euro was boosted as Germany’s consumer price index showed an unexpected uptick, with inflation strengthening to 1.7% on the year. Coupled with solid second quarter gross domestic product readings from France and Spain, this encouraged greater optimism in the underlying health of the Eurozone economy.
However, this is unlikely to be enough to prompt any significant shift in the policy outlook of the European Central Bank (ECB).
If the latest ECB Economic Bulletin highlights a continued sense of dovishness amongst policymakers this could weigh heavily on EUR exchange rates.
That being said, an uptick in German factory orders could be enough to shore up the Euro ahead of the weekend.