GBP/EUR Buoyed by Downside Surprise in Eurozone Inflation

GBP/EUR Exchange Rate Steady as Eurozone CPI Misses Ahead of ECB Meeting

UPDATE: The Pound Sterling to Euro (GBP/EUR) exchange rate firmed this afternoon as a weaker-than-expected Eurozone CPI reading puts the pressure on the ECB ahead of its policy meeting later this week.

Underlying inflation in the Eurozone fell to just 0.8% in May, matching the one-year low stuck in March, after a shock slump in services inflation.

This indicates that stubbornly low inflation in the Eurozone will continue to be a thorn in the side of the ECB for some time to come, and suggests the bank could push out the boat even further on its next rate hike.

GBP/EUR Exchange Rate Muted Following Weak UK Construction PMI

The Pound Sterling to Euro (GBP/EUR) exchange rate remains on the defensive this morning as markets digest the UK’s latest PMI figures.

At the time of writing the GBP/EUR exchange rate is trading at around €1.1247 on the inter-bank market, just below this morning’s opening rate.

Pound (GBP) Softens as UK Construction Growth Slumps to 14-Month Low

The Pound (GBP) is on the back foot against the Euro (EUR) this morning after the UK’s latest construction PMI came in well below expectations.

According to data published by IHS Markit, the UK’s construction index slumped from 50.5 to 48.6 in May, undershooting expectations it would hold at 50.5 and falling into contraction territory for the third time this year.

Unsurprisingly, Brexit had some role to play in this slowdown, with rising uncertainty in the UK leaving clients reluctant to make any major investments in the country.

Tim Moore, Associate Director at IHS Markit, said:

‘Survey respondents attributed lower workloads to ongoing political and economic uncertainty, which has led to widespread delays with spending decisions and encouraged risk aversion among clients.’

This also resulted in construction firms delaying the hiring of new staff, with the sector registering its largest fall in employment in over six years and further dampening Sterling sentiment.

While the Pound Sterling to Euro (GBP/EUR) exchange rate didn’t slide after the data was published, concerns that tomorrow’s UK services PMI will also disappoint increased.

Euro (EUR) Exchange Rates Subdued as Eurozone Inflation Plummets

However, the Euro (EUR) was unable to capitalise on the Pound’s weakness this morning after Eurozone Inflation fell faster than expected last month.

Eurostat reports that inflation in the bloc plummeted from 1.7% to just 1.2% in May – the lowest pace of price growth in over a year and well below the European Central Bank’s target rate of 2%.

However, accompanying the inflation figures was the Eurozone’s latest employment report, which helped stem the Euro’s losses as it revealed unemployment fell to a decade-low of 7.6% in April.

GBP/EUR Exchange Rate Forecast: UK Services PMI to Also Disappoint?

Looking ahead, movement in the Pound Euro (GBP/EUR) exchange rate on Wednesday is likely to be driven by the publication of the UK’s Services PMI.

Economists currently forecast that the service sector will have expanded again in May, albeit at a very modest pace.

However, given the contraction in both the manufacturing and construction sectors last month, it’s not too hard to imagine service activity also slumped, which would place further pressure on Sterling.

Meanwhile, the focus for EUR investors tomorrow will be the release of the Eurozone’s latest retail sales figures, with the single currency potentially softening if sales growth contracted in April as expected.

This will then be followed by the ECB’s rate decision on Thursday.

With no policy changes expected from the bank this month the focus for EUR investors may instead be on the fresh faces making an appearance at the meeting in Vilnius.

The ECB is set for a major shake-up in the coming months with nearly half of the Governing Council members, including President Mario Draghi, departing this year.

With this in mind markets will be paying close attention to the new officials for any signs the reshuffle could shift the bank’s thinking on monetary policy.

If the new policymakers include a number of known hawks, this would likely have a subduing effect on the Pound Euro (GBP/EUR) exchange rate.

Matthew Andrews

Contact Matthew Andrews