Third Consecutive Month of UK Construction Contraction Weighs Down Pound Euro Exchange Rate

GBP/EUR Exchange Rate Stalls as UK Construction Continues Contraction

A modest improvement in July’s UK construction PMI was not enough to prevent the Pound Sterling to Euro (GBP/EUR) exchange rate from losing fresh ground this morning.

While the index picked up from 43.1 to 45.3 on the month the underlying picture of the sector’s health remained unimpressive, with the PMI still sitting firmly in contraction territory.

As Duncan Brock, Group Director at the Chartered Institute of Procurement and Supply, commented:

‘The sector felt the pressure of challenging economic conditions and the impact of another disastrous drop in demand growth, as purchasing activity petered out and Brexit nibbled away at confidence and decision-making. Though the sector’s activity improved marginally on last month’s biggest fall in a decade, this third month of contraction in a row makes for gloomy reading.’

Even though the construction sector only accounts for a limited percentage of the UK gross domestic product this lacklustre level of growth still bodes ill for the wider economic outlook.

Weak Eurozone Manufacturing Limits Euro Upside

Although yesterday’s finalised raft of Eurozone manufacturing PMIs confirmed that the sector continued its slowdown in July the Euro (EUR) soon recovered its footing.

As markets had already largely priced in the impact of the underwhelming PMIs the potential for further losses proved limited, even as global trade tensions continued to pick up.

With forecasts pointing towards a modest rebound in Eurozone retail sales in June the mood towards the single currency could improve further this morning.

Higher levels of consumer spending would go some way towards balancing out the negative impact of the weakening manufacturing sector, boosting hopes of a stronger second quarter growth rate.

Even so, EUR exchange rates could come under renewed pressure if the latest Eurozone producer price index figures signal a weakening in inflationary forces.

Pound Sterling Remains Sensitive to Political Developments as Conservative Majority Narrows

Political developments look set to drive further volatility for the GBP/EUR exchange rate in the days ahead as markets continue to weigh up the odds of a no-deal Brexit scenario.

As long as members of Boris Johnson’s cabinet continue to adopt a hard-line on the Irish border issue Pound Sterling is likely to remain out of favour with investors.

However, with the Conservative working majority reduced to just one in the wake of Thursday’s Brecon and Radnorshire by-election there are hopes for a potential softening in Brexit rhetoric.

With the Liberal Democrats claiming a fresh seat the potential for a general election appears to have increased, leaving the Pound exposed to additional volatility in the coming days.

Weak UK Services PMI Could Drive GBP Exchange Rates to Fresh Lows

Looking ahead to next week, GBP exchange rates may move towards fresh multi-month lows if July’s services PMI also proves disappointing.

As the service sector remains the primary growth engine of the UK economy any weakness here could form a significant drag on the third quarter gross domestic product.

Even if the index holds steady at 50.2, however, this is unlikely to encourage any particular confidence among investors as Brexit-based uncertainty continues to hamper sector activity.

Without a solid positive surprise from the service sector data the GBP/EUR exchange rate looks set to continue trending in the region of a 23-month low.

Louisa Heath

Contact Louisa Heath