Pound Sterling to Euro (GBP/EUR) Exchange Rate Slides as UK Construction Hits Decade-Low

Pound Sterling Euro (GBP/EUR) Exchange Rate Slips as UK Construction Activity Plunges

Concerns surrounding the outlook of the UK economy mounted this morning as the UK construction PMI plunged to its worst level in a decade, leaving the Pound Sterling to Euro (GBP/EUR) exchange rate on the back foot.

Investors were caught off guard as the index unexpectedly slumped from 48.6 to just 43.1 in June as Brexit-based uncertainty continued to weigh on economic activity.

Commenting on the report, Tim Moore, Associate Director at IHS Markit, noted:

‘Delays to new projects in response to deepening political and economic uncertainty were the main reasons cited by construction companies for the fastest drop in total construction output since April 2009. While the scale of the downturn is in no way comparable that seen during the global financial crisis, the abrupt loss of momentum in 2019 has been the worst experienced across the sector for a decade.’

Following on the heels of yesterday’s similarly underwhelming manufacturing PMI this left Pound Sterling (GBP) lacking in support, with the odds of a weaker second quarter gross domestic product reading increasing.

Solid German Retail Sales Support Euro (EUR) Exchange Rates

A better-than-expected performance from May’s German retail sales data offered a boost to the Euro (EUR), with sales accelerating by a solid 4% on the year.

This suggests that domestic sentiment has continued to support the German economy, with higher levels of consumer spending limiting the impact of weakening export volumes.

Even so, as the monthly figure proved less encouraging in nature the positive impact on EUR exchange rates was ultimately limited at this stage.

Underwhelming Eurozone producer price index data also limited the Euro’s ability to capitalise on the relative weakness of the Pound, with the inflation outlook still appearing muted.

Disappointing UK Services Sector Performance May Add to GBP/EUR Exchange Rate Bearishness

The GBP/EUR exchange rate looks vulnerable to further selling pressure tomorrow if the June services PMI also falls short of forecast.

Although markets anticipate a positive showing from the PMI, with forecasts pointing towards a reading of 51, the risk of a downside surprise remains.

As the UK service sector remains a key growth engine any signs of weakness here could have a greater detrimental impact on the economic outlook, increasing the pressure on GBP exchange rates.

However, if the index remains in expansion territory, demonstrating resilience in the face of political uncertainty, this could see Pound Sterling rally against its rivals.

Fresh Signs of ECB Dovishness to Limit Euro (EUR) Strength

Commentary from European Central Bank (ECB) policymakers may put a dampener on the Euro in the coming days, meanwhile.

As long as the ECB appears to remain on course to loosen monetary policy in the near future the appeal of the single currency is likely to diminish.

Friday’s German factory orders figures could also offer a boost to the GBP/EUR exchange rate if orders show a fresh contraction on the month in May.

Unless the Eurozone’s powerhouse economy can demonstrate a greater degree of strength EUR exchange rates look set to maintain a bearish bias, with a weaker growth outlook encouraging the ECB’s dovish outlook.

Louisa Heath

Contact Louisa Heath