Pound Euro (GBP/EUR) Exchange Rate Struggles for Traction as Manufacturing PMI Disappoints

Pound Euro (GBP/EUR) Exchange Rate Gains Limited after UK Manufacturing Falls Short of Forecast

Even though Brexit-based uncertainty picked up once again over the course of the week the Pound to Euro (GBP/EUR) exchange rate was still able to regain some ground.

While January’s UK manufacturing PMI fell short of forecast the report was not entirely bearish in nature, with the headline index remaining comfortably above the long-term average.

Signs point towards rising export orders, which could help to offset the negative impact of higher input costs and slowing output growth.

As the Bank of England (BoE) has recently indicated a greater willingness to tackle rising inflation this naturally fuelled hopes that another interest rate hike could be on the cards soon.

This helped to keep the GBP/EUR exchange rate on a relatively narrow trend on Thursday, in spite of the growing sense of disunity within the governing Conservative Party.

Solid Eurozone Manufacturing PMIs Limit Euro Exchange Rate Downside

The Eurozone economy has continued to demonstrate signs of strength, meanwhile, maintaining a degree of downside pressure on the GBP/EUR exchange rate.

Wednesday’s Eurozone consumer price index data bettered forecast, with headline inflation clocking in at 1.3% on the year.

While this is still some way short of the European Central Bank’s (ECB) target inflation rate of 2% investors remain hopeful that the central bank will adopt a more hawkish outlook in the months ahead.

January’s finalised raft of Eurozone manufacturing PMIs added to the positive picture of the currency union’s economy, confirming that it maintained a strong level of momentum heading into 2018.

Even so, the bullish run of the single currency looked somewhat exhausted, with the impact of the positive PMIs already largely priced into EUR exchange rates.

GBP/EUR Exchange Rate Jitters Forecast on US Jobs Data

Developments surrounding the US Dollar (USD) may offer support to the GBP/EUR exchange rate ahead of the weekend.

With markets hopeful of a faster pace of Federal Reserve monetary tightening the appeal of the Euro has diminished, dented by the negative correlation of the Euro to US Dollar (EUR/USD) exchange rate.

As a result, positive US ISM manufacturing index and non-farm payrolls data could see the Euro falter as demand for the US Dollar increases.

Focus will also fall on December’s Eurozone producer price index figures, which may offer some indication as to the likely inflationary outlook.

Rising prices could boost hopes that inflation will pick up further over the coming months, giving the ECB further incentive to wind down its quantitative easing program.

Weaker-than-Forecast UK Services PMI may Dent Pound Euro Exchange Rate

Some of the stuffing could well be knocked out of the GBP/EUR exchange rate if the UK services PMI fails to impress on Monday.

As the service sector remains the key driver of the UK economy, accounting for more than three quarters of its gross domestic product, a weak showing here could weigh heavily on Sterling.

With forecasts pointing towards a slight moderation of growth on the month confidence in the underlying health of the UK economy is likely to be somewhat shaken.

Any downside surprise could see the GBP/EUR exchange rate slump sharply, particularly if accompanied by an increase in wider political concerns.

Ongoing worries over the likely shape of the UK’s future trade relationship with the EU will remain a headwind for Pound exchange rates for the foreseeable future.

Even so, if the Bank of England (BoE) proves more hawkish at its February policy meeting the downside potential of the GBP/EUR exchange rate will be limited.

Hannah Wilson

Contact Hannah Wilson