Pound Euro (GBP/EUR) Exchange Rate Rose as Sterling Strengthened
The Pound Euro (GBP/EUR) exchange rate firmed over the course of the week just gone, as UK PMIs exceeded expectations while weak German data weighed upon the Euro (EUR). Central bank comments and risk flows also influenced GBP/EUR trading.
At the time of writing, GBP/EUR is trading at €1.1553, having gained approximately 0.2% through last week’s trading session.
Pound (GBP) Firms on Combination of Data and BoE Tailwinds
The Pound (GBP) wavered against the Euro at the start of the week, as an improvement in the UK’s finalised manufacturing PMI had a limited effect. Although September’s data printed above forecasts by 0.1, manufacturing activity remained in contraction territory, marking one of the weakest readings in the past 14 years.
On Tuesday, risk-off sentiment prevailed, and GBP hit a weekly low against the single currency. While the Euro is not considered a safe-haven investment, it nevertheless attracts more support than the Pound in times of economic volatility.
Midweek, Sterling sentiment turned around, with the exchange rate rebounding as the UK’s service-sector PMI exceeded forecasts. While the reading showed the weakest service sector performance for eight months, it also ‘provided encouragement that headline rates of inflation will continue to moderate in the coming months.’
On Thursday, rocketing government bond yields and a weaker-than forecast construction PMI left the Pound to sink once more against the Euro. Amidst an uncertain inflation outlook, investors are reluctant to take on government debt, sending bond yields to a 25-year high. Meanwhile, construction data reflected turbulence in the domestic housing market.
At the end of the week, Sterling regained ground against EUR, although housing sector woes remained in focus. Nevertheless, comments from the Bank of England (BoE) helped maintain GBP optimism as both Governor Andrew Bailey and Deputy Ben Broadbent intimated that inflation was easing in a controlled manner.
Euro (EUR) Depressed by Weak German Data, USD Strength
The Euro struggled to make any meaningful gains against its peers on Monday as Germany’s finalised manufacturing PMI printed well into contraction territory at 39.6. As output fell to the greatest extent for almost three-and-a-half years, prospects for the bloc’s largest economy seemed bleak.
The Euro spiked up initially on Tuesday, but subsequently fell as the US Dollar (USD) climbed. Given the strong negative correlation between EUR and the ‘Greenback’, the single currency invariably falls when USD enjoys tailwinds.
Midweek, the single currency plummeted against Sterling on disappointing retail data, as August’s sales fell by 1.2% rather than the 0.3% expected. While finalised PMI data from both the wider Eurozone and Germany exceeded forecasts, economists’ downbeat forecasts for Q3 GDP weighed upon morale.
On Thursday, relatively hawkish comments from the ECB’s Luis de Guindos may have helped to cap Euro losses. The central bank’s vice president said that most measures of inflation have started to ease, following on from Christine Lagarde’s comments that borrowing costs will be set at ‘sufficiently restrictive levels for as long as necessary.’
At the end of the week, German factory orders grew by 2.1% more than expected; yet Euro gains were compromised by another surge of US Dollar tailwinds. Strong nonfarm payrolls data from the US buoyed the ‘Greenback’, depressing EUR – subsequently, GBP/EUR closed the week having gained approximately 0.2%.
GBP/EUR Exchange Rate Forecast: Influx of Data to Inspire Volatility?
Over the weekend, GBP/EUR has extended its climb, potentially buoyed by political developments in the UK. While wider geopolitical tensions would ordinarily boost the Euro over the Pound, Sterling appears to have gained strength alongside the Labour party’s annual conference.
An election next year could feasibly result in a change in the UK government: Labour has pledged a multitude of national improvements should it be elected to power, including speeding up connections to the country’s National Grid network.
Looking ahead, the Pound Euro exchange rate is likely to be affected in the week ahead by the publication of US inflation data on Thursday. If the release shows an easing of headline inflation, the Federal Reserve may ease off further monetary policy tightening measures, denting USD and boosting the Euro.
Ahead of this, German industrial production is forecast to drop again, potentially weighing on EUR; UK retail data is subsequently expected to show an increase in September’s sales. Moreover, UK GDP data looks to reveal economic expansion in the month of August, which may buoy GBP/EUR higher still.