Pound Sterling to Euro (GBP/EUR) Exchange Rate Returns to Back Foot as Outlook for UK Construction Soars

Strong UK Construction PMI Unable to Extend GBP/EUR Exchange Rate Gains

UPDATE: The Pound Sterling to Euro (GBP/EUR) exchange rate returned to a weaker footing this morning, in spite of the UK construction PMI bettering forecasts.

While the PMI strengthened from 52.1 to 53.2 this was not enough to encourage fresh gains for the Pound, with the outlook of the construction sector still appearing bearish.

Although the Italian manufacturing PMI slid into a state of contraction in October the mood towards the Euro still picked up ahead of the weekend as domestic jitters temporarily eased.

GBP/EUR Exchange Rate Holds Steady in Spite of BoE Brexit Warning

UPDATE: As widely anticipated the Bank of England (BoE) unanimously voted to leave interest rates on hold, although this failed to impact the mood towards Pound Sterling (GBP) today.

Although policymakers warned that interest rates could rise or fall after the UK leaves the EU this was not enough to dampen the bullishness of the Pound Sterling to Euro (GBP/EUR) exchange rate.

Markets were instead encouraged by BoE Governor Mark Carney’s belief that a no-deal Brexit is ‘not the most likely outcome’.

Reports of Brexit Deal on Services Boosts Pound Sterling Euro (GBP/EUR) Exchange Rate

Pound Sterling (GBP) surged higher this morning in the wake of reports that the UK and EU have reached a ‘tentative agreement’ on financial services and the exchange of data.

As the two sides have reportedly agreed to a state of regulatory equivalence which would allow City firms to continue operating in the EU after Brexit the mood of investors picked up.

This encouraged the Pound Sterling to Euro (GBP/EUR) interbank exchange rate to rise to a one-week high of €1.1355, even as anticipation mounted for the day’s Bank of England (BoE) policy announcement.

However, the Pound may struggle to hold onto this bullishness for long, with the final Brexit deal still far from settled and domestic political jitters lingering.

GBP/EUR Exchange Rate Volatility Forecast on BoE Announcement

With no change in policy expected from today’s BoE meeting GBP exchange rates could lose some of their strength over the course of the afternoon.

Even if the Monetary Policy Committee (MPC) leaves interest rates on hold, the nature of the accompanying meeting minutes could encourage greater Pound strength.

Signs that policymakers are increasingly in favour of higher interest rates may give the GBP/EUR exchange rate a sharp boost, raising the odds of a 2019 rate hike.

Ongoing uncertainty over Brexit is likely to keep the Bank in a state of stasis for the foreseeable future, though, preventing policymakers from committing to any tightening before the March deadline.

A more cautious quarterly Inflation Report may also limit the appeal of the Pound if the latest forecasts see any downward revisions.

Higher Eurozone Inflation Fails to Encourage EUR Exchange Rates

Even though the headline Eurozone inflation rate accelerated to 2.2% in October this failed to give the Euro (EUR) much of a boost on Wednesday.

While inflation remains in excess of the European Central Bank’s (ECB) 2% target investors see little chance of policymakers adopting a faster pace of monetary tightening.

As the Eurozone economy continues to show signs of losing its momentum this has undermined the case for tighter monetary policy, limiting the appeal of the single currency.

The ongoing dispute over the controversial Italian budget proposal is also weighing on EUR exchange rates, with the two sides remaining at odds over the 2019 budget deficit target.

Euro (EUR) Vulnerable to Italian Manufacturing Contraction

The appeal of the Euro could diminish further ahead of the weekend if October’s finalised raft of Eurozone manufacturing PMIs prove disappointing.

Particular focus is likely to fall on the Italian manufacturing PMI, with forecasts pointing towards the index dipping from 50 to 49.7.

If the Italian manufacturing sector falls into a state of contraction this could encourage fresh market anxiety over the budget spat.

Evidence that the Italian economy is already falling short in terms of growth raises the odds of further underperformance in the year ahead, increasing the sense of risk associated with the budget proposal.

As a result, the Pound Sterling to Euro (GBP/EUR) exchange rate could get a fresh boost tomorrow on the prospect of the dispute rumbling on as the Eurozone economy continues to lose momentum.

Hannah Wilson

Contact Hannah Wilson