Weaker German Services PMI Prompts Further Euro (EUR) Softness
Despite a stronger-than-expected German Manufacturing PMI the Euro to Pound Sterling (EUR/GBP) exchange rate remained on a downtrend on Friday morning. While Germany’s manufacturing sector expanded from 50.7 to 51.9 in April this was contrasted by a weaker Services PMI, which slumped from 55.1 to 54.6. With confidence in the outlook of the Eurozone still muted this saw the EUR/GBP exchange rate trending lower at 0.7867.
Euro (EUR) Exchange Rate Weakened after ECB Leaves Interest Rates Unchanged
It came as no particular surprise that the European Central Bank (ECB) did not make any change to its monetary policy in April, with President Mario Draghi maintaining a more dovish tone in later comments. While this initially failed to dent the appeal of the Euro (EUR) investor confidence ultimately faltered before the end of Thursday’s European session. As a result the Euro to Pound Sterling (EUR/GBP) exchange rate was trending lower in the region of 0.7882.
- Disappointing German PPI discouraged Euro demand
- Pound weakened by slower UK wage growth
- EUR/GBP exchange rate boosted by disappointing UK retail sales
- Euro volatility forecast on April ECB policy meeting
Euro (EUR) Slipped as German Producer Prices Weakened Inflation Outlook
Confidence in the robustness of the Eurozone was dented on Wednesday by the March German Producer Price Index figures, as prices unexpectedly slumped deeper into contraction territory. This would suggest that inflationary pressure within the Eurozone’s powerhouse economy is continuing to diminish. As this disappointing data also raised the suggestion that the European Central Bank (ECB) could be forced to adopt more severe monetary loosening measures in the future, demand for the Euro (EUR) was consequently diminished.
Nevertheless, the Euro to Pound Sterling (EUR/GBP) exchange rate regained some ground thanks to the latest raft of UK employment data. Unemployment was found to have edged higher for the first time since August, although the increase of 21,000 was not substantial enough to drive up the Unemployment Rate. As average weekly earnings also demonstrated an unexpected slowdown from 2.1% to 1.8% investors were inclined to move away from the Pound (GBP). As James Smith, economist at ING, commented:
‘It is possible that the uncertainty surrounding the EU referendum is starting to weigh on these figures, although this is unlikely to be the sole factor (after all, employment decisions tend to be made a few months prior to hiring). However, as business surveys are starting to suggest that firms are pulling back on hiring decisions, the referendum-related uncertainty may increasingly show up in the employment data over the coming months.’
Weak UK Retail Sales Boosted EUR/GBP Exchange Rate despite ECB Worries
Ahead of the ECB’s April policy meeting the Euro weakened across the board, with investors preparing for the possibility of more dovish rhetoric from President Mario Draghi. Markets are not pricing in any further monetary loosening action at this juncture, however, given the extent of the measures announced in March and the fact that notoriously hawkish Bundesbank President Jens Weidmann will be voting on policy once again.
UK Retail Sales proved decidedly discouraging on Thursday morning, sliding from 3.7% to 1.8% on the year in March. With consumer confidence appearing to have diminished in the face of referendum uncertainty, Sterling soon returned to a downtrend against rivals. As a result the EUR/GBP exchange rate regained a narrow uptrend in spite of worries over the imminent ECB policy meeting.
EUR/GBP Exchange Rate Forecast: ECB Commentary Predicted to Provoke Euro Volatility
Later today the Euro is likely to experience more turbulent movement on the back of comments from President Draghi. Should the policymaker provide a satisfactory reassurance that the ECB has not reached the end of the line in terms of stimulus the single currency may weaken sharply. However, if Draghi fails to convince investors of the possibility of lower negative interest rates then the EUR/GBP exchange rate could rally on Thursday afternoon.
Ahead of the weekend a raft of Eurozone PMIs could offer the Euro further support, providing the figures demonstrate fresh signs of robustness within the economy of the currency union. As there is no additional UK data due for release this week the pairing will be driven primarily by Euro sentiment and any new developments in the ongoing ‘Brexit’ debate.
Current EUR, GBP Exchange Rates
At the time of writing, the Euro to Pound Sterling (EUR/GBP) exchange rate was trending higher at 0.7890, while the Pound Sterling to Euro (GBP/EUR) pairing was on a downtrend around 1.2674.