Pound Euro (GBP/EUR) Exchange Rate Slips as Odds for November Rate Hike Fall
(Updated 16:30, 22/10/21) The Pound Euro (GBP/EUR) exchange rate has fallen today, as the UK’s mixed data releases this morning decrease the chances of a rate hike at the Bank of England’s (BoE) next policy meeting.
Earlier today, UK retail sales for September unexpectedly contracted for a record-breaking fifth month in a row. The UK’s CIPS/IHS Markit PMIs then beat forecasts, but revealed some concerns.
UK manufacturing output slowed to near stagnation, while the report also highlighted that a resurgence in Covid cases could stifle services growth.
With the UK’s economic recovery looking lopsided at best, some analysts think the BoE may exercise more caution.
Chris Williamson, Chief Business Economist at IHS Markit, conceded that higher inflation could fuel rate hike speculation before adding:
‘However, the economic growth signals from the PMI remain less convincing from a policy standpoint. The service sector is clearly in something of a sweet spot as the UK has seen more people’s lives and livelihoods return closer to normal. Some of the growth momentum will therefore fade as this rebound passes. Moreover, rising COVID-19 case numbers pose a downside risk to growth in the coming months, potentially deterring some services-oriented activity among consumers in particular and potentially leading to the renewed enforcement of health restrictions as winter draws in.’
Meanwhile, the BoE’s Chief Economist Huw Pill downplayed recent rate hike speculation. Earlier today he told the Financial Times:
‘Maybe there is a bit too much excitement in the focus on rates right now.’
With a November rate hike now looking less likely, the Pound Euro exchange rate has trended downwards overall today.
Original article continues below:
Pound Euro (GBP/EUR) Exchange Rate Fluctuates on High-Impact Data
The Pound Euro (GBP/EUR) exchange rate has traded in a wide range this morning, tumbling down to €1.1833 before bouncing back to €1.1864, where it holds at the time of writing.
The movement has been caused by a number of high-impact and surprising data releases, with UK retail sales unexpectedly contracting and the flash PMIs for both the UK and the Eurozone also producing unanticipated results.
Pound (GBP) Falls as Sales Slump, Regains Ground on PMIs
The Pound (GBP) slumped against the Euro (EUR) this morning ahead of the UK’s retail sales data, extending its downside after the report showed a shock contraction in sales.
UK retail sales fell by 0.2% in September, though they were expected to rise by 0.5%. This was a record-breaking fifth consecutive month of falling retail activity. The data is particularly dire considering the boost to sales caused by the panic-buying of petrol.
Some economists cite the report as further evidence that the UK’s economic recovery is stalling. Bethany Beckett, UK Economist at Capital Economics, commented:
‘The 0.2% m/m fall in retail sales volumes in September (consensus 0.5% m/m) offers more evidence that the economic recovery is fast running out of steam.
‘Indeed, this fall came despite the panic-buying related 2.9% m/m rise in petrol sales last month; retail sales volumes excluding fuel fell by 0.6% m/m. Given the backdrop of continued shortages and rising COVID-19 infections, we suspect that retail sales growth will continue to be weak in the coming months.’
However, the Pound has bounced, regaining lost ground, following its fairly positive PMIs for October.
Both the UK’s manufacturing and services PMIs unexpectedly improved. Services increased from 55.4 to 58, compared to the expected 54.5, while manufacturing rose from 57.1 to 57.7, versus forecasts of a drop to 55.8. However, manufacturing output fell to an eight-month low of 50.6 – close to the 50 mark that separates contraction from expansion.
This generally upbeat data for October has offset September’s sales slump, allowing the Pound to reverse this morning’s losses. However, we could see more movement as markets digest the data.
Euro (EUR) Loses Gains following PMIs
Meanwhile, the Euro (EUR) is losing ground on the back of its IHS Markit PMI results.
While the bloc’s manufacturing PMI did beat forecasts, it still slowed to an eight-month low. Manufacturing output dropped to a 16-month low of 53.2, led by declines in France (46.2) and Germany (51.1).
In addition, the Eurozone’s services PMI fell by more than economists expected, as the summer rebound began to fade and resurgent coronavirus case numbers hit the sector.
Chris Williamson, Chief Business Economist at IHS Markit, said:
‘While the overall rate of economic growth remains above the long-run average for now, risks seem tilted to the downside for the near-term as the pandemic continues to disrupt economies and push prices higher. After strong second and third quarter expansions, GDP growth is looking much weaker by comparison in the fourth quarter.’
This worrying outlook has seen the Euro relinquish its gains this morning, with GBP/EUR back to its opening levels, at the time of writing.
Pound Euro Exchange Rate Forecast: More Volatility as Markets Digest Data?
We could see more volatility as markets digest the full implications of the data and adjust their positions. In particular, it will be interesting to see how traders price the probability for a Bank of England (BoE) rate hike following the UK’s mixed data.
Heading into the afternoon, risk appetite could play a role in the Pound Euro pair. A current risk-on mood is weighing on the safe-haven US Dollar (USD); if sentiment sours, renewed USD strength could pressure EUR due to the currencies’ negative correlation.