The Pound to Euro exchange rate seesawed last week on the back of data and concerns regarding Brexit and the monetary policy outlook for the Eurozone.
Ultimately, however, Sterling found more support and GBP EUR was able to end the week almost a cent above Monday’s opening levels.
Poor Start to the Week for GBP EUR after Disappointing Construction and Services PMIs
GBP EUR started the week on soft form after the latest UK construction PMI from Markit showed an unexpected slowdown in sector activity.
Economists had believed that the index would tick up to 52 from 51.9, but the measure instead fell to 51.1.
A large fall in commercial construction drove the slowdown, which prompted markets to sell out of Sterling on the fear that business investment across the board was slowing.
This actually allowed GBP to shrug off the impact of an 11-month low reading for the services PMI, as psychological resistance helped keep the Pound supported.
Poor Eurozone data also aided the GBP EUR advance by softening the Euro. French and Italian services and composite PMIs largely disappointed forecasts, while Eurozone retail sales declined -0.3% on the month in July as expected.
Euro Rises on Improving ECB Policy Outlook, While GBP Softens on Repeal Bill Debate
Markets reacted positively to the latest European Central Bank (ECB) meeting on Thursday.
The Euro rose higher after President Mario Draghi claimed that very preliminary discussions into tapering quantitative easing had begun and would continue in great detail at the next policy meeting.
GBP EUR quickly dropped, but rebounded somewhat to hold above the week’s opening levels.
Sterling was unsettled by the debate in Parliament surrounding the UK’s EU repeal bill. This will enshrine EU laws into UK law in order to avoid legal black holes once Brexit has been completed.
However, Labour and the Liberal Democrats are expected to oppose the current version of the bill due to some of the powers it grants the government.
However, GBP was able to rally at the end of the week after a string of positive UK data releases.
Although industrial production growth slowed as forecast and construction output registered a worse-than-expected contraction on the month, manufacturing production solidly beat expectations and the trade deficit narrowed slightly rather than widening.
The National Institute of Economic and Social Research (NIESR) released its latest GDP estimate, which calculated that growth in the three months to August had picked up to 0.4% from the 0.2% seen in the three months to July.
GBP EUR Exchange Rate Forecast; UK Monetary Policy Outlook in Focus
The outlook for UK monetary policy could change dramatically this week, given that tomorrow sees the release of consumer prices data for August and on Thursday the Bank of England (BoE) will make its latest monetary policy decisions.
Inflation is expected to strengthen to 2.8%, which is slightly below the peak reached earlier this year and therefore unlikely to push the BoE into hiking interest rates.
The Pound could therefore fall following the release of the data.
Most of the Eurozone’s data releases this week are low impact, but the common currency could see significant volatility on the back of speeches from Vitor Constancio tomorrow, Yves Mersch on Thursday and Sabine Lautenschlaeger on Friday.