Pound Sterling to Euro (GBP/EUR) Exchange Rate Forecast to Rally on Stronger UK Services PMI

Weaker Eurozone Producer Price Index Fails to Boost Pound Sterling Euro (GBP/EUR) Exchange Rate

UPDATE 15:42 BST: An unexpected dip in April’s Eurozone producer price index figures failed to offer much support to the Pound Sterling to Euro (GBP/EUR) exchange rate.

Even though producer prices were found to have stagnated on the month the mood towards the Euro (EUR) remained generally positive on Monday, in spite of what this suggests for the Eurozone’s inflationary outlook.

With the US Dollar (USD) on the back foot thanks to limited safe-haven demand EUR exchange rates held onto a bullish trend.

Pound Sterling Euro (GBP/EUR) Exchange Rate Falters on Underwhelming Manufacturing and Construction PMIs

May’s UK manufacturing PMI beat forecasts, helping to shore up the Pound Sterling to Euro (GBP/EUR) exchange rate ahead of the weekend.

Markets were encouraged by the improvement in the headline PMI, which unexpectedly picked up from 53.9 to 54.4, even though the underlying details of the report were less positive.

There are still signs that elevated levels of Brexit-based uncertainty are weighing on the economic outlook, with sector growth largely driven by a backlog of existing orders in May.

An unchanged construction PMI prompted Pound Sterling (GBP) exchange rates to return to a weaker footing on Monday, with business optimism slipping to a seven-month low.

This undermined hopes that the UK economy had recovered some of its lost momentum in the second quarter, giving investors less incentive to favour the Pound in the near term.

GBP/EUR Exchange Rate Falls Back as Eurozone Political Uncertainty Eases

With the sense of political uncertainty that had gripped the Eurozone economy easing, support for the Pound Sterling to Euro (GBP/EUR) exchange rate has diminished.

While concerns remain over the new populist coalition government in Italy, this failed to weigh on the Euro (EUR) at this stage.

As there appears to be less risk of a fresh election, and the prospect of a stronger swing towards Eurosceptic parties, the mood towards the single currency picked up sharply.

However, as the Five Star Movement-League alliance still looks set to clash with EU officials over budget restrictions and other policies the potential for further EUR exchange rate weakness remains.

The ousting of former Spanish Prime Minister Mariano Rajoy also had limited negative impact on the Euro, although fears of a US-EU trade war soon started to weigh on market sentiment.

Although German and Eurozone inflation data beat forecasts this was not enough to keep the GBP/EUR exchange rate under pressure for long.

Improved UK Services PMI Forecast to Prompt GBP/EUR Exchange Rate Rally

The Pound Sterling to Euro (GBP/EUR) exchange rate could find a rallying point, however, if May’s UK services PMI proves positive.

If investors see signs that the service sector is picking up momentum this may help to limit concerns over the outlook of the UK economy.

Forecasts point towards a modest improvement on the month, with the index expected to rise from 52.8 to 53.0.

Even if the headline figure strengthens, though, GBP exchange rates could struggle to capitalise on this if the underlying details of the report prove less encouraging.

As a significant degree of uncertainty continues to surround the issue of Brexit, with the matter of the Irish border still unresolved, the domestic outlook remains challenging.

Even so, bets that the Bank of England (BoE) is on course to raise interest rates again sooner rather than later should limit the vulnerability of Pound Sterling.

Sharp Moves Forecast for Pound Sterling Euro (GBP/EUR) Exchange Rate on ECB Comments

Commentary from European Central Bank (ECB) policymakers looks set to provoke volatility for the Pound Sterling to Euro (GBP/EUR) exchange rate this week.

After May’s stronger-than-expected Eurozone inflation data there are hopes that the ECB could start to shift towards a more positive outlook in the months ahead.

If ECB President Mario Draghi adopts a more upbeat tone when he delivers a speech on Tuesday demand for the single currency is likely to increase sharply.

As forecasts point towards a sharp uptick in the latest Eurozone retail sales figures the mood towards the Euro could improve further.

If the threat of a US-EU trade war continues to mount, however, this is likely to offer support to the Pound Sterling to Euro (GBP/EUR) exchange rate.

Hannah Wilson

Contact Hannah Wilson