GBP/EUR Exchange Rate: Pound Softens as UK Demonstrates Uneven Growth
The UK’s round of August PMIs proved rather mixed in nature, with solid service sector growth offsetting a slowdown in both the manufacturing and construction sectors.
The improvement in the headline services PMI failed to offer the Pound any particular boost, however, as markets remained concerned by the uneven nature of UK economic growth.
Even though the UK looks set to achieve a growth rate of 0.4% in the third quarter the underlying picture of the domestic economy looks less encouraging.
With business optimism continuing to falter, doubts are mounting over the economy’s ability to sustain its momentum in the coming quarters.
A dip in the third quarter consumer inflation expectation measure could increase the selling pressure on GBP exchange rates on Friday.
GBP/USD Exchange Rate: Hopes for Longer BoE Governor Term Limit Sterling Losses
Speculation that Bank of England (BoE) Governor Mark Carney could extend his tenure encouraged cable investors to pile back into the Pound this week.
The possibility of greater continuity in the wake of Brexit gave GBP exchange rates a solid boost, even though confirmation of an extended term was still lacking.
Worries over Brexit continued to dampen sentiment towards the Pound, however, as EU negotiators rejected Theresa May’s proposals on post-Brexit trade.
Unless the two sides show signs of overcoming the key outstanding issues fears of a no-deal Brexit are likely to keep GBP exchange rates on a generally weaker footing for some time to come.
USD/GBP Exchange Rate: US Dollar Continues to Capitalise on Trade Tensions
An unexpectedly strong surge in the ISM manufacturing index prompted the US Dollar to pick up sharply in the wake of the Labour Day bank holiday.
With the US manufacturing sector experiencing another month of robust growth confidence in the economic outlook naturally improved, in spite of ongoing trade tensions.
Safe-haven demand also boosted the US Dollar, with US-Canada trade talks continuing to drag and the threat of further tariffs on Chinese products in the pipeline.
Further strength is likely in store for USD if the ISM non-manufacturing composite index proves similarly solid, although jitters are expected ahead of Friday’s non-farm payrolls report.
However, if the US unemployment rate tightens from 3.9% to 3.8% as forecast this is likely to drive USD exchange rates higher heading into the weekend.
EUR/USD Exchange Rate: Surprise Inflation Dip Dents Euro
Demand for the Euro weakened sharply on Friday after the Eurozone consumer price index showed a surprise dip on the year, slowing from 2.1% to 2.0%.
While this is still in line with the European Central Bank’s (ECB) inflation target this easing undermined confidence in the policy outlook, with policymakers now under less pressure to hike interest rates.
As ratings agency Fitch opted to lower its outlook on Italy from stable to negative this put further pressure on EUR exchange rates, although worries over the Italian budget diminished over the course of the week.
Further weakness could be in store for the single currency in the days ahead, with forecasts pointing towards a narrowing of the German trade surplus.