Pound to Euro Exchange Rate Forecast: Can Stronger UK PMIs Boost Sterling Demand?

Update: Better-Than-Forecast UK Manufacturing PMI Shores up GBP/EUR Exchange Rate

An unexpected uptick in the UK manufacturing PMI offered some encouragement to the Pound to Euro (GBP/EUR) exchange rate during trade on Tuesday.

As the sector continued to demonstrate a relatively robust pace of growth this gave investors cause for confidence in the UK outlook.

Even so, as concerns remain over the economy’s ability to maintain its momentum in the coming months the upside potential of the Pound (GBP) was still rather limited.

Pound Euro Exchange Rate Muted as One-Year Brexit Countdown Begins

Confirmation that the UK gross domestic product (GDP) slowed to 0.4% in the fourth quarter of 2017 left the Pound to Euro (GBP/EUR) exchange rate on a generally weaker footing ahead of the Easter weekend.

Investors were also unimpressed by the mixed nature of the latest raft of UK data, as the Nationwide house price index pointed towards a fresh loss of momentum within the domestic housing market.

With less than a year now until the Brexit deadline of March 2019 the outlook for the Pound (GBP) remains somewhat limited, in spite of recent progress towards a transition deal and signs of agreement on a number of key issues.

This lingering sense of political uncertainty helped to keep the GBP/EUR exchange rate under some degree of pressure even as the German consumer price index fell short of forecasts.

Easing Eurozone Growth Limits EUR Exchange Rate Upside

Weaker-than-forecast German retail sales helped to limit the downside potential of the GBP/EUR exchange rate on Tuesday morning.

Lower levels of consumer spending within the Eurozone’s powerhouse economy added weight to concerns that inflationary pressure is still not building as the European Central Bank (ECB) would like.

Downward revisions to both Italy and Germany’s March manufacturing PMIs encouraged further Euro (EUR) softness, undermining confidence in the domestic outlook.

Despite the PMIs remaining firmly above the neutral baseline of 50, indicating solid sector expansion on the month, markets remain somewhat ambivalent about the economic outlook.

As the ECB appears unlikely to return to a monetary tightening bias in the near future this has dampened the mood of EUR exchange rates, stalling any substantial improvement in the appeal of the single currency.

Euro Vulnerable as Underwhelming Eurozone Inflation Forecast

Demand for the Euro may weaken further if the Eurozone consumer price index also fails to strengthen as forecast, to the benefit of the GBP/EUR exchange rate.

Although both the Italian and French inflation figures were positive on Friday the overall figure could still prove underwhelming.

With inflation still lagging far behind the ECB’s 2% target even a modest uptick is unlikely to be enough to fuel any significant EUR exchange rate gains.

Nevertheless, if the Eurozone unemployment rate shows a further dip in February this may give the Euro a solid boost on Wednesday.

Meanwhile, any fresh weakening of the US Dollar (USD), driven by concerns over a potential US-China trade war, could limit the downside potential of EUR exchange rates.

GBP/EUR Exchange Rate Volatility Forecast on UK Services PMI

A rallying point could be in store for the GBP/EUR exchange rate this week, providing that March’s UK services PMI prints positively.

As the service sector accounts for more than three quarters of the UK gross domestic product a stronger showing here would naturally bode well for the wider economic outlook.

If the services PMI can demonstrate resilience as the first quarter comes to an end the appeal of the Pound could well pick up, with confidence in the prospect of further growth improving.

However, as forecasts point towards a loss of momentum on the month this may leave the GBP/EUR exchange rate on a downtrend.

Signs that the economy is still under pressure as a result of persistent Brexit-based uncertainty would give the Pound fresh cause for weakness, with markets still debating the odds of any imminent Bank of England (BoE) policy action.

Hannah Wilson

Contact Hannah Wilson