- German and French economies shrugged off impact of Brexit – Eurozone PMIs bettered expectations
- Strong US Manufacturing PMI undermined Euro strength – Likelihood of Fed rate hike increased
- Pound dented by sharp contraction in economic activity – UK PMIs fell back to levels not seen since the financial crisis
- German IFO Business Confidence Survey weakens – EUR GBP exchange rate struggled on signs of bearishness
Discouraging UK Optimism Index Failed to Boost EUR GBP Exchange Rate
Despite the CBI Business Optimism Index showing a shocking fall from -5 to -47 in July this failed to offer any particular support to the EUR GBP exchange rate. Investors remained content to buy back into to Pound, particularly as the Euro is overshadowed by rising bets of a 2016 Fed rate hike. As a result the EUR GBP exchange rate was on a narrow downtrend around 0.8364.
(Previously updated at 10:22 on 25/07/2016)
German Confidence Data Beats Forecasts, But EUR GBP Exchange Rates Struggle Today
Better-than-forecast German data did little to support the Euro to Pound Sterling exchange rate today, with the pairing sliding almost 0.3% as European trading progressed.
The EUR GBP exchange rate hit a lot of 0.8335 despite the German IFO measures of Business Climate, Current Assessment and Expectations printing more strongly than expected.
The Business Climate gauge came in at 108.3 in July, down from 108.7 in June but better than the 107.5 reading expected by economists.
An increase of 0.1 was seen in the Current Assessment index, rather than the 0.6 drop forecast, with the measure climbing from a positively revised 114.6 to 114.7.
The Expectations index dipped from 103.1 to 102.2, defying forecasts for a result of 101.6.
(Previously updated 08:00 25/07/2016)
Ahead of the weekend the EUR GBP exchange rate made strong gains, benefitting from some markedly discouraging UK data.
Euro (EUR) Struggled to Consolidate Gains despite Strong Eurozone PMIs
Fears of Brexit-based uncertainty negatively impacting on the Eurozone economy seemed to be proven unfounded on Friday morning. The July raft of Manufacturing, Services and Composite PMIs generally bettered expectations, shoring up confidence in the domestic economy and the Euro (EUR) by extension. Investors were particularly encouraged by the strong performance of the German measures, which showed that economic activity had continued to grow strongly in defiance of wider market turmoil as the Composite PMI surged from 54.4 to 55.3. Also of note was the robustness of the French economy, with the service sector unexpectedly edging back into expansion territory in spite of some decidedly negative conditions.
However, the single currency struggled to make gains across the board thanks to release of a stronger-than-expected US Manufacturing PMI. This latest sign of bullishness within the world’s largest economy helped to boost bets that the Federal Reserve could opt to raise interest rates before the end of the year. As a result the US Dollar (USD) trended higher, driving down the Euro as markets anticipate greater policy divergence between the two central banks.
Odds of BoE Interest Rate Cut Boosted by Shockingly Weak UK Economic Activity
Demand for the Pound (GBP), on the other hand, was decidedly weak ahead of the weekend. Following up poor June Retail Sales figures the raft of flash July PMIs fell short of forecast, signalling a greater negative impact from Brexit. The first ecostats compiled since the surprise result of the EU referendum, the PMIs pointed towards a particularly sharp contraction in economic activity in response to the ensuing uncertainty. As analysts at Lloyds Bank noted:
‘While sentiment may yet stabilise over the coming months, the marked deterioration in the headline activity readings is also borne out in the forward-looking business expectations for the service sector, which historically have had a closer mapping with official services sector output measures. These saw the biggest decline on record, to the lowest reading since December 2008.’
This seemed to significantly raise the chances of the Bank of England (BoE) being prompted to cut interest rates at its next policy meeting in August. Given the dovishness of Governor Mark Carney in comments since the referendum it appears likely that the BoE will want to act sooner rather than later in the event of the economy starting to weaken. Consequently the Euro to Pound (EUR GBP) exchange rate leapt to a high of 0.8423.
EUR GBP Exchange Rate Forecast: Declining German Business Confidence could Dent Euro
Further support for the single currency could materialise this morning if the German IFO Business Sentiment Survey for July proves positive. However, investors anticipate that confidence has been knocked by the fallout of the UK’s vote to leave the EU. If sentiment is shown to have weakened, despite the positive PMI readings, then the EUR GBP exchange rate could be prompted to trend lower.
Even so, the appeal of the Pound is unlikely to improve due to expectations of a sharp weakening in CBI Industrial Trends Orders for July. Forecasts point towards a slump from -2 to -10 in response to the Brexit vote, with any further indications of economic weakness predicted to weigh heavily on the already softened Sterling. Consequently the EUR GBP exchange rate could still make gains, even in the event of disappointing Eurozone data.
