- Friday’s GDP Supports Euro – Pre-crisis level GDP boosts Eurozone sentiment
- Draghi Defends ECB – ECB President responds at length to German critics
- UK Manufacturing Contracts – Tuesday’s report unexpectedly below 50.0 cusp
- Update: Construction Disappoints – Second UK PMI this week prints lower than expected
- Forecast: UK Composite PMI Due Thursday – Investors fear a possible poor PMI hat-trick
EUR/GBP Continues to Rally Throughout Wednesday
Since the release of UK’s Manufacturing PMI on Tuesday, the Euro has been able to maintain height as it rallies over the Pound, trending in the region of 0.7938.
This has been largely due to Britain’s disappointing Manufacturing PMI bringing along with it a sentiment that ‘Brexit’ rows had done worse than just drag down the Pound – they have also caused notable uncertainty in British businesses.
Reports that economic uncertainty in Britain was lower in March than any point in at least 19 years seemingly explained the unexpected contraction in Manufacturing PMI.
This was followed by poor Construction PMI released on Wednesday, which dropped from 54.2 to 52.0 despite expectations that it would score 54.0 in April.
Poor Eurozone retail sales reports printed at 2.1% in its year-on-year print, undermining the prediction that it would drop from 2.7% to 2.6%. However, sentiment towards the Pound was low enough for the Euro to sustain its height.
The Euro to Pound Sterling (EUR/GBP) exchange rate continued to make gains as markets reopened for this week, sustaining a slight advance today, with investor sentiment remaining strong after Friday’s promising Gross Domestic Product (GDP) reports.
The increasingly volatile pair succeeded in gaining around 40 pips last week, trading at around 0.7837 as Eurozone markets opened this weekend. While trade was light on Monday (with the UK observing a bank holiday), EUR/GBP is currently almost 0.3% up and trending in the region of 0.7880.
Draghi Defends Low Rates; Tension Weighs on Otherwise Strong Euro
European Central Bank (ECB) President Mario Draghi spoke in Frankfurt on Monday, with analysts’ main take-away from the speech being his statements regarding recent ECB criticism from Germany.
The ECB president had come under fire from German Finance Minister Wolfgang Schauble and a German newspaper that blamed the ECB’s extensive easing measures for the recent rise of Eurosceptic right-wing behaviour in Germany.
Draghi responded by talking about why low and negative interest rates were necessary;
“In a world where real returns are low everywhere, there is simply not enough demand for capital elsewhere in the world to absorb that excess saving without declining returns…
If central banks did not do this, investing would be unattractive, so the economy would stay in recession.”
According to the Financial Times, he criticised Eurosceptic attitudes by arguing that investment and spending that could help the economy recover was being held back by the Eurosceptic attitude itself.
This follows the Euro’s bullish session on Friday, as Eurozone Gross Domestic Product (GDP) was confirmed to have reached pre-recession levels of 0.6%. Producer price index figures released on Tuesday morning also printed better-than-expected.
Pound Sterling (GBP) Cedes Ground to Stronger Euro on Poor Manufacturing PMI
The Pound may well be at the mercy of its PMI results this week, as poor Manufacturing PMI data began the currency’s session on Tuesday morning.
Printing at a disappointing 50.7 in March, analysts hoped the figure would improve to a healthier 51.2 in April – especially amid hopes that Tata Steel’s UK business may recover. Unfortunately, the April report shocked investors by coming in below the contraction cusp of 50.0, at 49.2.
Despite taking up only a small amount of Britain’s GDP, the bearish Manufacturing report weighed on the Pound regardless as investors began to worry about other upcoming PMI releases this week.
Regardless, the Pound has been largely able to hold its ground on decreased ‘Brexit’ bets (also likely to increase Euro sentiment) and has continued to be strong against many of its major rivals, largely losing out to the currently strong Euro, according to Bloomberg.
Euro to Pound Sterling (EUR/GBP) Exchange Rate Forecast: UK and Eurozone PMI Reports due this Week
EUR/GBP could continue to move in the Euro’s favour this week, unless Eurozone data prints considerably poorly, with EU retail sales and PMI reports due throughout the week.
First of all is Wednesday’s Final Eurozone scores for Services and Composite PMI, as well as Eurozone retail sales data for March. Retail sales are currently expected to improve from 2.4% to 2.6%, so a reading lower than 2.6% could cause more bearish Euro activity.
The Pound, on the other hand, may need to wait for developments in ‘Brexit’ debates or Thursday’s UK PMI before it sees another inspired movement.
Tuesday’s low Manufacturing PMI score will likely put even further pressure on Thursday’s Services PMI to perform well. It is currently forecast to slow from 53.7 to 53.5, and a worse score than this could send Sterling dropping against a strengthening Euro.
At the time of writing, the Euro to Pound Sterling (EUR/GBP) exchange rate was trending in the region of 0.7880, while the Pound Sterling to Euro (GBP/EUR) exchange rate traded at around 1.2692.