Pound Euro (GBP/EUR) Exchange Rate Retains Upside Following Lagarde Speech

GBP/EUR Exchange Rate Retains Morning Highs on Weaker Euro

(Updated 16:55, 05/10/2021) The Pound Euro (GBP/EUR) exchange rate is holding onto its earlier gains this afternoon as EUR continues to face pressures from supply chain disruptions and concerns over the Chinese economy. European Central Bank President Christine Lagarde’s speech seems to have had little effect on trading sentiment.

According to economists at Rabobank, ‘concerns about slowing growth in China are likely to push their way back to Europe through Germany’s manufacturing sector.’ Bank representatives also comment upon the possible effects of ongoing energy shortages:

‘Higher energy prices come as a threat to real incomes and demand, given signs that wage inflation remains subdued… safe-haven [currencies are likely to see increased] demand given the catalogue of headwinds facing higher yielding markets (higher US rates, increase in energy prices, fears of a China slowdown).’

Meanwhile, deployment of army officials to deliver oil from depots to forecourts seems to have eased UK fuel concerns slightly, boosting GBP sentiment. The UK’s upwardly revised services PMI continues to lend support.

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Pound Euro Exchange Rate Climbs on Positive UK Data, Euro Weakness

The Pound Euro (GBP/EUR) exchange rate has risen through this morning’s session as GBP receives tailwinds from a stronger-than expected UK services PMI. Conversely, the Euro (EUR) is under pressure as the US Dollar (USD) strengthens after three consecutive daily pullbacks.

At the time of writing, GBP/EUR is trading at €1.1748, up 0.3% from today’s opening levels.

Pound (GBP) Strengthens on Strong Services PMI

The Pound (GBP) is trending up against the majority of its peers today as a strong UK services PMI buoys trading sentiment.

The Markit/CIPS data was revised up from 54.6 to 55.4 this morning, reflecting a strong recovery in UK service sector activity. The majority of panel members expect a rise in output during the year ahead, with only 8% forecasting a fall.

Gains are capped, however, by concerns over severe supply chain constraints, as service sector companies report the slowest rise in new orders since March- in the wake of the winter lockdown.

Staff shortages are also blamed for a fall in orders, as a lack of candidates to fill vacancies combines with the end of the government furlough scheme in suppressing employment growth.

According to Tim Moore, economics director at IHS Markit:

‘Survey respondents widely noted that shortages of staff, raw materials and transport had resulted in lost business opportunities… Constraints on business capacity and rampant supply chain uncertainty meant that service providers have become more willing to pass on higher costs to customers.’

Euro (EUR) Falls as USD Strength Exerts Downside Pressure

The Euro is struggling to find support today as strength in the US Dollar weighs upon the single currency amidst a risk-off market mood.

Inflation fears are contributing to broad risk aversion, as the European Central Bank (ECB) rejects suggestions that rising prices across the bloc may not be temporary; fears of ‘stagflation’ in the UK follow a similar theme.

Concern over the US debt ceiling continues to weigh upon trading sentiment likewise: President Joe Biden has warned that the US could default on its debt within two weeks if Republicans do not cooperate on raising or suspending the debt ceiling.

In China, Evergrande Group continues struggling with its debt payments: another construction company, Fantasia Holdings Group Co, also missed a dollar bond payment and added to downbeat sentiment.

Finally, both German and Eurozone services PMIs have declined on last month as service sector optimism slipped down to a five and six month low, respectively. In the Eurozone, the rate of jobs growth slowed to a four-month low.

Pound Euro Exchange Rate Forecast: Lagarde Speech to Boost Euro?

Looking ahead, a speech from ECB President Christine Lagarde this afternoon may buoy EUR trading sentiment, if Lagarde strikes a hawkish tone.

Lagarde has maintained that the central bank will uphold an ultra-accommodative monetary policy until now: given recent inflationary pressures, however, the ECB President may alter the bank’s forward guidance.

Olivia Evershed

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