Pound Sterling Euro (GBP/EUR) Exchange Rate Stumbles as UK Manufacturing Decline Continues

Weak UK Manufacturing Activity Weighs on Pound Sterling Euro (GBP/EUR) Exchange Rate

The Pound Sterling to Euro (GBP/EUR) exchange rate remained under pressure at the start of the week thanks to confirmation that the UK manufacturing PMI contracted in November.

Although the finalised headline PMI saw a slight upward revision from 48.3 to 48.9 this still signalled an underwhelming month of activity for the manufacturing sector.

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

‘A heavy sense of inevitability hung around the sector in November as it continued to suffer the effects of a lethal cocktail of Brexit uncertainty, slowing global growth and an impending General Election. These combined to stifle any chance of manufacturing crawling out of the contraction zone, where the sector was stuck for a seventh month in a row.’

This weak reading gave investors fresh reason to bet on a weaker fourth quarter gross domestic product, leaving Pound Sterling (GBP) on a softer footing this morning.

German Manufacturing PMI Uptick Limits Euro (EUR) Downside

A surprise improvement in the German manufacturing PMI helped to shore up the Euro (EUR), meanwhile, even as the sector lingered in negative territory.

As the Eurozone’s powerhouse economy recorded its strongest manufacturing sector performance in five months EUR exchange rates found some cause for confidence.

Even so, the risk of a weak fourth quarter growth performance still looks set to hang over the single currency in the weeks ahead.

Until markets see signs that the Eurozone manufacturing sector is experiencing a sustained rebound the Euro may remain vulnerable to renewed selling pressure.

Euro Looks for Boost on Greater Eurozone Services PMI Resilience

If Wednesday’s set of Eurozone services PMIs also see an upward revision this could put the GBP/EUR exchange rate under greater pressure.

Evidence of greater resilience within the service sector could help to offset the impact of the lacklustre manufacturing data, encouraging hopes of a stronger fourth quarter GDP.

On the other hand, any downgrade to November’s service sector data may weigh heavily on the single currency in the days ahead.

While investors continue to hope for a breakthrough in US-China trade relations the threat of a sustained global trade slowdown could limit confidence in the Euro.

If a deterioration in export volumes continues to plague the German economy the odds of a fourth quarter growth disappointment are likely to increase, to the detriment of EUR exchange rates.

Underwhelming UK Service Sector Performance Set to Weigh Down GBP/EUR Exchange Rate

Markets anticipate no particular change for the finalised UK services PMI, meanwhile, limiting the potential for a GBP/EUR exchange rate rally.

As long as the index remains below the neutral baseline of 50, signalling a contraction, worries over the outlook of the UK economy are likely to persist.

Given that the service sector still accounts for more than three quarters of the UK’s economic activity a weak showing here significantly raises the risk of a disappointing fourth quarter growth reading.

Without signs of greater resilience within the service sector the mood towards the Pound looks set to sour further this week.

Louisa Heath

Contact Louisa Heath