GBP/EUR Exchange Rate Slips after Trio of UK PMIs Cast Doubts on 2018 UK Economic Forecasts

Poor UK Ecostats Weaken 2018 Economic Forecast and Drag GBP/EUR Exchange Rate Lower Today

Fears over the Brexit negotiations and Theresa May’s ability to hold onto power in the face of strong dissent from within her own party weighed on the GBP/EUR exchange rate at the beginning of last week.

A leaked Brexit report prepared for the Cabinet caused further jitters on Tuesday after concluding the UK economy would be worse off in all potential outcomes (although it included no analysis of Theresa May’s preferred bespoke deal).

However, the Pound to Euro pairing was able to record some gains after German consumer price index figures for January showed a worse-than-expected -0.7% decline in prices on the month and a slowdown from 1.7% to 1.6% on the year.

Sterling was knocked down again on Wednesday when the Eurozone consumer price figures showed the expected uptick in core price growth from 0.9% to 1% and a smaller-than-expected slowdown in overall prices to 1.3% instead of 1.2%.

Downwards Euro Pressure from Upbeat Federal Reserve Meeting Fails to Support Pound Sterling after January PMIs Disappoint

The Pound also found support on Thursday as markets reacted to the previous evening’s monetary policy decision from the US Federal Reserve, with the post-meeting statement hinting that four rate hikes might be necessary during the course of 2018.

This pressured the Euro lower, even though the UK’s Markit manufacturing PMI revealed an unexpected decline from 56.2 to 55.3.

GBP began to tumble on Friday after the construction index also slumped, dropping to within a whisper of contraction territory at 50.2.

The data indicated that the UK economy may have started the New Year on a poor footing, after ending 2017 on solid form.

GBP/EUR Exchange Rate Weakens Today after UK Service Sector Slowdown Knocks UK 2018 Interest Rate Forecast

Service sector data covering January from IHS Markit released this morning has significantly disappointed forecasts after unexpectedly falling from 54.1 to a 16-month low of 53.

The index, which has just registered its worst performance since September 2016, was expected to inch up to 54.2.

According to Chris Williamson, IHS Markit Chief Business Economist:

‘While the fourth quarter PMI readings were historically consistent with the economy growing at a resilient quarterly rate of 0.4-0.5%, in line with the recent GDP estimate, the January number signals a growth rate of just under 0.3%.’

The Pound Sterling to Euro exchange rate has only slipped marginally lower, even though solid finalised Eurozone PMIs have revealed that the currency bloc’s private sector grew at the fastest pace in 11 years during January.

Markets are reluctant overly commit to the Euro just now, given that this afternoon’s US ISM non-manufacturing index could weaken EUR if it further improves the outlook for US monetary stimulus this year.

Will Bank of England Cause Pound Sterling to Euro Exchange Rate Volatility with Monetary Policy Forecast Update?

After a quiet Tuesday and Wednesday for economic data, the calendar promises significant volatility on ‘Super’ Thursday, as the Bank of England (BoE) announces the results of its first monetary policy meeting of 2018 as well as publishing its latest Inflation Report.

Some recent solid data had led markets to believe the BoE may even consider raising interest rates in the near-term – although not as soon as this month – so the minutes of the Monetary Policy Committee (MPC) gathering will be carefully analysed for clues regarding the outlook of rate setters.

However, given the weakness of the latest trio of Markit PMIs (which have arrived too late to influence the BoE’s decision this month) even an upbeat outlook from policymakers could be taken with a pinch of salt.

In terms of Eurozone data, tomorrow’s retail PMIs could further firm the picture of a buoyant Eurozone economy, while the European Commission’s economic forecasts, released on Wednesday, could bring more good news about the Eurozone’s economic outlook.

German trade figures and the European Central Bank (ECB) Economic Bulletin on Thursday will round off the week’s Eurozone data, with nothing set for publication on Friday.

John Cameron

John studied economics at Cambridge University and later became an MSTA qualified Technical Analyst. He began working for TorFX almost a decade ago and now holds a Senior Account Manager position. As well as lending his clients support and guidance, John has produced market commentary and detailed exchange rate analysis for a number of online publications.

Contact John Cameron