Pound Euro Exchange Rate Stumbles following BoE’s Bailey Speech

Pound Euro (GBP/EUR) Exchange Rate Trips as BoE’s Bailey Says Covid Impact Still Strong

(Updated 16:15, 01/12/21) The Pound Euro (GBP/EUR) exchange rate dipped this afternoon following a speech from the Bank of England (BoE) Governor Andrew Bailey.

While Bailey remained coy on the subjects of BoE policy and the Omicron variant, he sounded cautious as he spoke about the affects of the Covid pandemic on the UK economy. Bailey said:

‘Direct economic effects of COVID have attenuated a lot since the fall in GDP in the second quarter of last year, when we went off a cliff.

‘However, there are still impacts that we are feeling from COVID quite strongly…

‘Even now, services are recovering but we have still got quite a long way to go. That has put quite a strain on supply chains around the world’.

Sterling, which had edged up against the Euro (EUR) today, slipped following these comments. GBP investors were seemingly discouraged by the gloomy remarks.

However, the Pound Euro exchange rate recouped some of those losses by the end of the European session, leaving it only marginally below its opening level.

Original article continues below:

Pound Euro (GBP/EUR) Exchange Rate Wavers as Supply Disruption Hampers European Production 

The Pound Euro (GBP/EUR) exchange rate has wavered today, trading sideways overall, as the finalised PMIs for the Eurozone and the UK show that supply constraints continue to hamper factory activity. 

The Pound Euro pair is currently trading at around €1.17581, virtually unchanged from this morning’s opening level of €1.17584.

Pound (GBP) Flat on Mixed Manufacturing PMI 

The Pound (GBP) is fairly subdued this morning after the UK’s manufacturing PMI printed marginally lower than preliminary estimates. 

The finalised PMI score for November came in at 58.1 versus the flash result of 58.2, though this still shows an improvement from October’s score of 57.8. The reading shows strong expansion overall (with a score above 50 indicating growth), however the PMI report did raise concerns. 

While output growth picked up from October’s eight-month low, export sales fell for the third consecutive month. Weaker demand from China, Brexit-related disruption to EU trade and cancellations due to supply chain issues all hit exports. 

In addition, backlogs continued to disrupt activity, while input costs hit a record high. 

As such, the PMI gives a mixed but familiar picture of UK manufacturing activity, leaving Sterling without a clear direction. 

Euro (EUR) Muted on Disappointing Data 

The Euro (EUR) is in a similar position. Today’s manufacturing PMI for the Eurozone also came in below initial estimates, dropping from 58.6 to 58.4, but still showing a slight improvement on the previous month’s score of 58.3. 

As with the UK PMI, many of the indicators of expansion in the Eurozone manufacturing sector improved. However, ‘severe supply-related constraints’ bedevilled factory operations. 

Chris Williamson is the Chief Business Economist at IHS Markit, the group that published the PMI. He said: 

‘A strong headline PMI reading masks just how tough business conditions are for manufacturers at the moment. Although demand remains strong, as witnessed by a further solid improvement in new order inflows, supply chains continue to deteriorate at a worrying rate. Shortages of inputs have restricted production growth so far in the fourth quarter to the weakest seen over the past year and a half.’ 

The PMI came off the back of Germany’s latest retail sales figures, which also disappointed markets. Domestic sales in Germany unexpectedly contracted in October by 0.3%. 

Pound Euro Exchange Rate Forecast: US Data and BoE’s Bailey in Focus 

There could be more movement in the Pound Euro exchange rate this afternoon. Economists expect the latest US employment and manufacturing data releases to print fairly positively, which could boost the US Dollar (USD) today. As the Euro and US Dollar are negatively correlated, a rise in USD could put pressure on EUR. 

Meanwhile, GBP investors will be paying close attention to a speech from Bank of England (BoE) Governor Andrew Bailey. With the Omicron variant dampening expectations of a December rate hike, markets will be looking for clues about when the British central bank might tighten monetary policy. 

Samuel Birnie

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