- UK Services PMI dipped to thirty-eight month low – Pound softened as economic outlook muted
- Discouraging Eurozone Retail PMIs weighed on Euro demand – Signs of slowdown in currency union mounted
- Wave of UK property funds suspended amid investor jitters – EUR GBP exchange rate benefitted from fresh volatility
- Pound boosted by strong production figures – Investors encouraged despite limited freshness of results
Narrowed German Surplus Keeps Euro (EUR) on Downtrend
German trade data for May proved disappointing, with the trade surplus narrowing further than forecast to weigh heavily on the Euro (EUR). Although the latest measure of UK consumer confidence, taken post-referendum, showed a sharp weakening from -1 to -9 this failed to dent the bullishness of the Pound (GBP). As a result the EUR GBP exchange rate extended its downtrend, slumped in the region of 0.8522 towards the close of Friday’s European session.
(Previously updated at 16:15 on 07/07/2016)
Strong UK Data Prompted Sharp EUR GBP Exchange Rate Downtrend
Confidence in the Pound (GBP) surged on Thursday, with investors enthused by better-than-expected UK production data. Industrial and manufacturing output in May bettered forecast to boost the appeal of Sterling, in spite of the fact that this growth has likely been reversed in the wake of the Brexit vote. As a result the EUR GBP exchange rate slumped, trending in the region of 0.8552 towards the close of the European session.
(Previously updated at 09:16 on 07/07/2016)
A number of property funds have been frozen this week due to Brexit-based worries, allowing the EUR GBP exchange rate to make gains in spite of discouraging Eurozone data.
Over the past 7 days the Euro Pound exchange rate has climbed from 0.8246 to 0.8608. Further Euro gains could be on the horizon as demand for the Pound remains severely limited.
Outlook of Eurozone Economy Mixed as Italian Banking Fears Mounted
Rumbles of trouble in the Italian banking industry have weighed on the appeal of the single currency (EUR) in recent days, with the spectre of Brexit igniting fears over the high levels of bad debt within the sector. The prospect of another crisis on the back of the UK’s vote to leave the EU did not particularly encourage investors, weakening the Euro in spite of the pervasive atmosphere of safe-haven demand. Domestic data also proved mixed on Tuesday, with the finalised raft of Services and Composite PMIs showing an upward revision as Eurozone Retail Sales fell short of forecast.
Even so, pressure on the Pound (GBP) remained severe, with economic and political uncertainty continuing to hamper the outlook of the British asset. Worries over the UK economy were exacerbated by the June Services PMI, which fell back to a thirty-eight month low of 52.3 even before the results of the EU referendum were known. This would suggest that the sector is in store for a greater slowdown in growth in July, as confidence is damaged by the fallout of the vote. As a result the EUR GBP exchange rate trended sharply higher, despite words from Bank of England (BoE) Governor Mark Carney.
Property Fund Freezes Bolstered EUR GBP Exchange Rate on Pound Turmoil
Some of the bullishness of the EUR GBP currency pair faded on Wednesday morning in response to a raft of decidedly disappointing Eurozone data. German Factory Orders failed to strengthen as far as forecast in May, while the Construction and Retail PMIs for June both slumped. This all seemed to point towards weakness within the Eurozone’s powerhouse economy, denting sentiment towards the Euro further. Also of concern was a sharp dip in the Italian Retail PMI, which plunged from 45.2 to 40.2 to signal a worsening sector contraction.
However, Sterling struggled to particularly capitalise on this bearishness as the Brexit fallout continued. Although the Conservative leadership election continued apace uncertainty remained the dominant factor for the Pound, with nothing in the way of positive domestic data to distract investors from pessimistic speculation. Confidence was not improved by a number of property funds being gated in response to a wave of redemption requests, as researchers at BBH noted:
‘Markets were spooked by news this week of pressures in the UK property market, as several asset managers froze withdrawals from property funds after a spike in redemptions was seen. Another asset manager today said it halted plans to lease new offices in London due to the Brexit vote, as it appears that stress on the UK property market is just beginning.’
EUR GBP Exchange Rate Forecast: Slowed UK GDP Predicted to Weigh on Pound
It seems unlikely that sentiment towards the Pound will particularly pick up today, especially if additional property funds are prompted to close their doors in the coming days. Hopes are also not high for the latest UK Industrial and Manufacturing Production figures, with signs of a wider slowdown expected to materialise. Markets will also be keen to see the NIESR Gross Domestic Product Estimate for June, which could trigger further Pound losses if the result proves negative.
If the German Industrial Production results for May do not show any particular improvement then the Euro could see further downside bias, with the outlook of the currency union very much dependent on the German economy. Weakness in the US Dollar (USD) could also help to shore up the EUR GBP exchange rate, although Friday’s US Non-Farm Payrolls report is forecast to boost the ‘Greenback’ with a strong rebound.