Renewed Sense of Market Optimism Drives Pound Sterling Euro (GBP/EUR) Exchange Rate Gains
Easing market anxiety helped to drive the Pound Sterling to Euro (GBP/EUR) exchange rate higher today as worries over rising US-China tensions temporarily faded.
Although May’s finalised raft of Eurozone manufacturing PMIs showed an improvement from the record lows seen in April this failed to shore up the Euro (EUR).
Germany’s manufacturing performance proved a little weaker than initially forecast, highlighting the extent of the challenges still facing the Eurozone’s powerhouse economy.
As Phil Smith, principal economist at IHS Markit, noted:
‘Even though more factories have started to resume operations after the loosening of restrictions, weak underlying demand is still a limiting factor, as evidenced by the survey’s measure of new orders rebounding far less than that of output in May.
‘Manufacturing production was already down 7-8% from a peak in late-2017 even before the onset of the pandemic, and now that figure looks to be in the region of 25-30%.’
With the German economy looking set to struggle for some time yet to come the strength of EUR exchange rates naturally diminished.
Improved UK Manufacturing PMI Limits Pound Downside
Confirmation that the UK manufacturing PMI had recovered from its April low offered a boost to Pound Sterling (GBP), meanwhile.
A lack of negative revision to the manufacturing sector data encouraged investors to take a positive view, even though the UK economy remains on track for a second quarter contraction.
Fresh moves towards an easing in lockdown conditions also helped to fuel demand for the Pound as businesses continued to gear up for a return to trading.
While it remains to be seen how soon the economy will return to a state of normality investors still took encouragement from the news.
Falling UK Mortgage Approvals May Dent GBP/EUR Exchange Rate
The mood towards the Pound could sour once again on Tuesday, though, if April’s raft of mortgage and credit data fail to impress.
With forecasts pointing towards a fresh decline in mortgage approvals and consumer credit support for the GBP/EUR exchange rate looks set to diminish.
Lower levels of lending would offer further evidence of the dampening impact that the Covid-19 crisis has already had on the UK households and the wider economy.
As long as signs continue to signal a weakening in economic activity in the second quarter the appeal of the Pound is likely to deteriorate.
Softening German and Eurozone Unemployment Set to Drag on Euro
Support for the Euro may weaken on the back of the latest German and Eurozone unemployment rate figures, however.
Markets expect to see a sharp increase in unemployment in May, pushing the German jobless rate up from 5.8% to 6.2%.
As long as the labour market shows fresh signs of weakening this could drag on demand for the single currency as economic worries continue to mount.
Unless the unemployment rate shows a smaller increase than anticipated the GBP/EUR exchange rate could find a fresh rallying point on Wednesday.