Pound Euro Exchange Rate Falls as UK Economic Outlook Worsens

Pound Euro (GBP/EUR) Exchange Rate Drops amid Slowdown in Factory Activity

(Updated 12:10, 1/9/21) The Pound Euro (GBP/EUR) exchange rate dropped to a six-week low earlier this morning, after initially making some gains, as the UK’s economic outlook continues to worsen.

Despite being revised marginally higher, the latest manufacturing PMI for the UK revealed the slowest pace of expansion in factory activity since March. The UK PMI printed at 60.3 while the Eurozone PMI came in at 61.4.

The supply chain crisis continues to undermine production, while staffing and trade issues related to Brexit also caused headaches for British manufacturers.

Duncan Brock, Group Director at the Chartered Institute of Procurement & Supply, said that there are ‘signs of stagnation’ in today’s report, and warned of shortages in the coming months:

‘Businesses were thwarted by brittle supply chains struggling with shortages, port and transportation difficulties as delivery times stretched not to days or weeks, but months for some goods.

‘New orders continued to flow in for the seventh month in a row, but a mismatch between supply and demand is affecting the UK economy. There is a question mark over whether supply chain managers have ordered early enough to fulfil customer needs, as the continuing deterioration in supplier performance, close to last year’s pandemic lows could result in meagre offerings on shelves in the shops in the coming months.’

The PMI is the latest data release to point to a slowdown in the UK’s economic recovery and is putting downward pressure on the Pound (GBP).

Original article continues below:

Pound Euro (GBP/EUR) Exchange Rate Makes Modest Gains on EUR Weakness

The Pound Euro (GBP/EUR) exchange rate is making some modest gains this morning, after a huge slump in German retail sales and downwardly revised PMIs for both Germany and the Eurozone.

Yet Sterling’s gains seem to be capped by a bleak UK outlook, with signs that the economic recovery is slowing down compounded by fears of post-furlough redundancies.  

Pound (GBP) Capped by Downbeat UK Economic Outlook

The Pound (GBP) initially gained on the Euro (EUR) this morning, as the latter suffered from some poor retail sales figures from Germany.

Additionally, the UK’s finalised manufacturing PMI for August was revised slightly higher, which gave the Pound a modest boost.

However, worries about the UK’s economic recovery and worsening Covid situation are limiting the Pound’s upside.

Yesterday’s consumer credit data, which showed a shock drop in consumer credit, added to fears that the UK’s economic recovery has been stifled by rising coronavirus cases and disruption caused by the ‘pingdemic’.

Ruth Gregory of Capital Economics told clients yesterday:

‘Overall, today’s release is similar in tone to July’s retail sales data in suggesting that the resurgence in virus cases weighed on the recovery in consumer spending.

‘As a result, the risks to our view that GDP in July rose by about 0.5% m/m and that monthly GDP will climb back to its pre-pandemic size by October are skewed to the downside.’

Meanwhile, business groups and unions are calling for the furlough scheme to be extended in the UK’s worst-affected industries, such as aviation, amid fears of redundancies. The scheme is due to end this month, though some sectors are still struggling from the effects of the pandemic.

This generally downbeat outlook seems to be limiting Sterling’s upside.

Euro (EUR) Dented by German Retail Sales Slump

The Euro (EUR) is struggling this morning after Germany’s retail sales for July slumped by 5.1%, far worse than the 0.9% contraction economists predicted.

The decline in sales is partly due to the high volume of sales in June, which was brought about by the easing of coronavirus restrictions, but the worse-than-expected figures are still weighing on the single currency.

In addition, the final manufacturing PMIs for both Germany and the Eurozone were revised marginally lower as global supply chain issues continue to disrupt factory activity.

However, the downside in EUR may be offset somewhat by yesterday’s Eurozone CPI figures. Headline inflation soared to 3% last month, beating forecasts of 2.7% to print way above the European Central Bank’s (ECB) 2% inflation target.

While the CPI was pushed higher by Germany’s temporary VAT cut last year, some economists expect the 3% figure will spark debate among ECB policymakers over whether the bank should begin tapering its pandemic emergency purchase programme (PEPP).

Following the CPI yesterday, ECB members Klaas Knot and Robert Holzmann signalled their support for tapering bond purchases. Meanwhile, the Federal Reserve’s indication that it will begin tapering before the end of this year sets a precedent for other central banks to follow suit.

Pound Euro Exchange Rate Forecast: Could the Euro Recover this Afternoon?

The Eurozone’s latest unemployment data could boost the Euro as we approach noon. The unemployment rate fell to 7.6% in July, as economists predicted. This modest decrease in unemployment may be enough to tip the balance in the single currency’s favour.

This afternoon, data from the US may influence the Pound Euro pair by way of the negative correlation between the Euro and the US Dollar (USD). Strong figures from the ADP employment change report or ISM manufacturing PMI could support the ‘Greenback’, thereby denting EUR.