GBP/EUR exchange rate ticks higher as EU PMIs print mixed
The pound euro (GBP/EUR) exchange rate gained ground this morning following the release of finalised PMI data from both Germany and the wider Euro area. While services activity in Europe’s largest economy exceeded earlier estimates, activity in the broader Euro area slowed.
At the time of writing, GBP/EUR is trading at €1.1757, marginally higher than today’s opening levels.
Euro (EUR) struggles to attract support ahead of ECB decision
While somewhat supported by Germany’s better-than-expected finalised PMI data, the euro (EUR) is wavering in several exchange rates as investors are wary of placing bullish bets. Given the likelihood of an interest rate cut from the European Central Bank (ECB) tomorrow, trading sentiment is subdued.
In a speech given earlier this morning, European Central Bank (ECB) policymaker and Slovakian central bank governor Peter Kazimir affirmed that inflation is on a good trajectory, adding that he believes that ECB is nearing its first interest rate cut.
Also weighing upon the single currency may be lingering headwinds following yesterday’s German jobs data. Joblessness remained close to historic highs in May, as the number of unemployed persons jumped by 25,000.
Renewed strength in the US dollar (USD) ahead of the upcoming ISM services PMI is another factor likely to be depressing the euro. Service sector growth in the US is expected to have returned to expansion in May, the expectation of which is buoying USD; given the strong negative correlation between EUR and the ‘Greenback’, the single currency is under pressure.
Monetary policy divergence between the ECB and the Federal reserve compounds central bank headwinds, as markets aren’t currently pricing an interest rate cut from the Fed until September. Looking to tomorrow’s ECB announcement, Eugene Epstein, head of structuring for North America at Moneycorp in New Jersey, comments:
‘If the ECB cut[s] rates, which [is] already priced in, I would focus on the tone of the statement and see if there is a divergence from the Fed.’
Pound (GBP) pressured by service-sector slowdown
The pound (GBP) is trading in a narrow range against its peers today following the release of May’s finalised service sector PMI. The reading confirmed earlier estimates, printing at 52.9: investors were disappointed given the fall from April’s figure of 55.0.
Analysts attributed April’s reading to a sharp increase in new orders and increasing business activity, remarking that expansion had occurred at the sharpest pace in one year. Conversely, May’s data represents a sharp slowdown. Nevertheless, S&P Global observe that today’s release confirms a seventh consecutive month of expansion.
Continued growth in the sector indicates that prohibitive price pressures are easing, as Joe Hayes Principal Economist at S&P, observes:
‘That’s now three months on the trot that selling price inflation in the service sector has eased – this will be very encouraging to the (BoE’s) Monetary Policy Committee and suggests the trajectory of services prices is moving in the right direction.’
Yet a lack of additional data and no further clarity regarding the Bank of England (BoE)’s interest rate cut trajectory caps tailwinds, as the central bank have pledged not to disclose their intentions until after the upcoming general election.
Financial markets are currently pricing in two rate cuts this year, with the BoE’s August meeting earmarked as the start date for monetary policy unwinding.
GBP/EUR exchange rate forecast: ECB commentary to inspire movement?
While the European Central Bank is generally perceived as dovish in being the first of the major central banks to cut interest rates, the monetary policy statement accompanying tomorrow’s announcement affords an opportunity for policymakers to restore traders’ optimism.
The anticipated rate cut is unlikely to have a major effect upon euro exchange rates, given that it is widely expected – the euro may yet find support if the ECB remark upon signs of strength in the Eurozone economy. Ahead of the bank decision, German factory orders are expected to report growth in April; on the other hand, Eurozone retail sales look to have suffered.
In the UK, meanwhile, an ongoing lack of significant data leaves the pound to trade upon external factors. Risk aversion is likely to pressure the increasingly risk-on currency, while a strong risk appetite could buoy sterling.