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Euro to Pound Exchange Rate Edges Higher as UK Growth Outlook Continues to Worsen

Euro to Pound Exchange Rate Climbs as Investors Anticipate Key Ecostats

When markets opened on Wednesday morning, the Euro to Pound (EUR/GBP) exchange rate continued to climb following its Tuesday recovery. Investors were anticipating the morning’s Eurozone and UK ecostats.

Last week saw EUR/GBP rise from 0.8773 to 0.8804 due to a disappointing UK growth report. While the pair dipped back down to last week’s levels on Monday, it recovered on Tuesday and this morning touched on its best level since March – 0.8829.

Demand for the Euro (EUR) was firm ahead of the day’s key Eurozone ecostats, and the shared currency was able to easily hold its ground higher against a broadly weak Pound (GBP).

In the end though, Eurozone growth projections and unemployment results met forecasts and had little influence on the Euro outlook.

The Pound has been weakened due to a worsening economic outlook, as well as resurgent political concerns amid Brexit uncertainties and the resignation of one of UK Prime Minister Theresa May’s major pro-EU cabinet members.

Pound (GBP) Exchange Rates Undermined as UK Growth Outlook Weakens

In the past few weeks, Pound investors have gone from expecting a Bank of England (BoE) interest rate hike as soon as May, to betting that next action from the BoE could be quite a ways away.

Repeatedly disappointing UK ecostats have left investors doubting that Britain’s economy is strong enough to sustain tighter monetary policy within the short term, especially after the latest manufacturing PMI fell short of expectations too.

On Tuesday, Markit’s UK manufacturing PMI from April only came in at 53.9 – almost a whole point short of the forecast 54.8. The previous figure was revised lower too, from 55.1 to 54.9.

The worst manufacturing print in 17 months indicated to investors that Britain’s economy continued to slow more than expected in Q2 2018, following projected quarterly growth of just 0.1% in Q1.

Demand for the Pound did improve slightly on Wednesday though, as Britain’s latest construction PMI beat expectations.

Political uncertainties are weighing on Sterling again however.

After the resignation of ex-UK Home Secretary Amber Rudd, investors hoping for a soft Brexit are anxious about the UK government losing one of its major pro-EU cabinet members. This was especially concerning as Brexit negotiations are set to resume this week.

Euro (EUR) Exchange Rates Supported as Manufacturing Beats Expectations

The Euro did see some fresh support on Wednesday, as April’s final manufacturing PMIs for the Eurozone from Markit largely beat projections.

German manufacturing beat expectations, but French manufacturing unexpectedly climbed and the overall Eurozone print only slipped to 56.2 rather than the forecast 56.0.

Markit’s chief economist, Chris Williamson, argued that uncertainty still remains in the manufacturing sector which could become clearer in the coming months:

‘While the current pace of growth remains solid, the trend in the surveys in coming months will provide important clues as to the degree to which underlying demand may be waning and the extent to which policymakers should be concerned about the health of the economy.’

If more aspects of the Eurozone economy begin to beat expectations again, investors may become more optimistic about the possibility of tighter monetary policy from the European Central Bank (ECB) within the foreseeable future.

Euro to Pound (EUR/GBP) Forecast: Central Bank Speculation to be Affected by Thursday Data

Major Eurozone and UK data will be published on Thursday which is likely to have an influence on the Euro to Pound (EUR/GBP) exchange rate.

The Eurozone’s final April Consumer Price Index (CPI) results will be published on Thursday, but unless they are surprising they are unlikely to be hugely influential.

If Eurozone inflation comes in above expectations despite recent underwhelming inflation figures from Eurozone member nations, the Euro would see stronger demand as European Central Bank (ECB) interest rate hike bets would strengthen.

The Pound, on the other hand, is likely to be influenced by Thursday’s UK services PMI from April. As services make up a notable chunk of Britain’s economic output, this figure could cause even bigger weakness in Sterling if it disappoints.

A stronger than expected UK services report could instead bolster hopes about the resilience of Britain’s economy in Q2 2018. This may even support Bank of England (BoE) interest rate hike bets.