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EUR GBP Recovers despite Solid UK Construction PMI

Update: The Euro is recovering after yesterday’s losses, rising 0.3% against the Pound to 0.8723, even though the latest UK construction PMI has leapt up to a 17-month high of 56.

The Euro Pound exchange rate has managed to edge 0.1% higher today to 0.8736 after strong Eurozone data releases.

Eurozone PMIs have been positive overall today, even though some of them have actually clocked in below forecast.

Ireland’s manufacturing index climbed from 55 to 55.9; a 22-month high thanks to rising new orders and an improvement in economic conditions.

Spanish factories also had a good month, with the manufacturing PMI hitting a four-month best of 55.4.

The Italian and French indices were less impressive, with the former falling much-further-than-expected to 55.1 and the latter unexpectedly dipping to 53.8.

The reports are still positive because they all show a significant uptick in the pace of hiring – which is great for the Eurozone economy and also for inflationary prospects.

Hiring in the manufacturing sector rose at a six-year high in Germany, the fastest since 1999 in Italy and the fastest in 19 years in Spain. This, combined with recent strong unemployment figures for the currency bloc, bodes particularly well for the overall economy.

Meanwhile, finalised first-quarter Italian GDP figures have come in significantly above forecast, showing double the pace of forecast growth on the quarter at 0.4% and 1.2% year-on-year growth instead of 0.8%.

This has allowed the Euro Pound exchange rate to edge higher, although gains have been slowed by a positive result from the latest UK manufacturing PMI from IHS Markit/CIPS.

The index slipped from 57.3 to 56.7, but this was better than the forecast drop to 56.5 and overall the survey revealed strong sector activity and an improving outlook.

The survey … provided positive signs that the upturn may be sustained, as growth of new orders remained solid, backlogs of work rose at the quickest pace in six years and business optimism improved to a 20-month high,’ explains IHS Markit Senior Economist Rob Dobson. ‘These underlying dynamics are proving to be a real boon for the manufacturing labour market, with May seeing jobs added at the fastest pace since mid-2014.’

House price data wasn’t so positive, however, preventing the Pound from resisting the Euro’s advance this morning.

There is fresh evidence that the UK’s housing market is cooling, with a third month of declines marking the worst drop in property prices since the financial crisis.

After contracting -0.4% in April, values were expected to recover 0.2% in May, but instead continued to decline -0.2%.

On a year-on-year basis, growth slowed from 2.6% to 2.1% – worse than the 2.4% predicted and also the weakest increase in around four years.

It is still early days, but this provides further evidence that the housing market is losing momentum,’ explains Nationwide Chief Economist Robert Gardner. ‘Moreover, this may be indicative of a wider slowdown in the household sector, though data continues to send mixed signals in this regard.’

The Euro could weaken tomorrow, given that the only data on offer is the producer price index for April.

Forecasts are for a strong uptick in price growth, which would suggest building inflationary pressures, but headline US data – including the vital non-farm payrolls report – could depress appetite for the common currency.

Additionally, the UK Markit/CIPS construction PMI is set for release tomorrow morning and a solid figure here as well would boost the Pound on hopes that the stoicism seen in the rest of the economy has also benefitted the key services sector.