Pound Sterling to Euro (GBP/EUR) Exchange Rate Benefits from German Manufacturing Slump

German Manufacturing Contraction Supports Pound Sterling Euro (GBP/EUR) Exchange Rate

As the German manufacturing sector slipped further into contraction territory this gave the Pound Sterling to Euro (GBP/EUR) exchange rate a boost this morning.

While forecasts had pointed towards the sector remaining under pressure investors were still caught off guard as the manufacturing PMI dipped from 49.7 to 47.6.

This weaker showing also pulled down the overall Eurozone manufacturing PMI, raising fresh concerns over the economic outlook of the currency union and keeping the Euro (EUR) under pressure.

While the Eurozone services PMI showed a solid improvement on the month this was not enough to outweigh the weakness of the manufacturing data, especially as the French service sector remains in contraction.

Strong Public Finances Boost Pound Sterling (GBP) Exchange Rates

Confidence in Pound Sterling (GBP), meanwhile, was boosted thanks to a better-than-expected public sector net borrowing figure for January.

Strong income tax receipts helped to lift the public finances to their strongest January since records began in 1993 with a surplus of 14.9 billion.

This offers a boost to Chancellor Philip Hammond ahead of the Spring Statement, suggesting that UK finances are in a resilient state at the start of 2019.

Even though business investment has seen a significant decline in recent months, owing to Brexit-based uncertainty, this has yet to impact the underlying public finance figures.

These improved finances give the Chancellor greater opportunity to support the UK economy in the event of a potential no-deal Brexit, giving GBP exchange rates fresh cause for confidence.

Euro (EUR) Vulnerable to Weakening German Business Confidence

The mood towards the Euro could sour further ahead of the weekend if IFO’s German business confidence survey shows a continued deterioration in sentiment.

Another decline in business confidence would weigh heavily on the single currency, indicating that the German economy could continue to lose momentum in the months ahead.

Signs that businesses are taking an increasingly cautious view of the economy outlook would not bode well for the first quarter German gross domestic product.

As the German economy narrowly avoided falling into a recession at the end of 2018 any evidence of weakening domestic activity may drag EUR exchange rates down across the board.

Negative CBI Trade Index to Drag on Pound Sterling (GBP)

GBP exchange rates may come under fresh pressure on Friday, meanwhile, if February’s CBI distributive trades index proves negative.

Fresh evidence of weakening economic activity could see the GBP/EUR exchange rate return to a downtrend, with confidence in the outlook of the UK economy still muted.

Unless the economy proves itself capable of shaking off the persistent sense of Brexit-based uncertainty the Pound looks set to remain vulnerable to selling pressure.

In the absence of any tangible progress towards a finalised Brexit agreement the GBP/EUR exchange rate may struggle to hold onto an uptrend.

Louisa Heath

Contact Louisa Heath