- Osborne scrapped target to produce budget surplus by 2020 – Pound failed to pick-up in response
- Confidence in Euro remained muted despite bullish Eurozone PMIs – Brexit fears weighed on outlook of single currency
- UK Construction PMI hit lowest level since September 2009 – Outlook of UK economy dented by faltering economic activity
- Sterling slipped after Services PMI also disappoints expectations – GBP EUR exchange rate remained on bearish trend
Weak UK Services PMI Dented Pound Demand
Investors were discouraged to find that the UK Services PMI had fallen back to a thirty-eight month low of 52.3 in June, reinforcing concerns that the domestic economy has slowed. This prompted the GBP EUR exchange rate to extend its losses, with the pairing falling to a fresh two-year low of 1.1690 on Tuesday.
The Pound remains trading in a softer position against the Euro and has also fallen to a new multi-year low of 1.29 against the US Dollar.
(Previously updated at 14:11 on 05/07/2016)
Pound Jittery in Anticipation of BoE Financial Stability Report
Ahead of the Bank of England’s (BoE) latest Financial Stability Report confidence in the Pound (GBP) weakened once again. Investors are concerned to see the Bank’s assessment of the UK economy in the wake of the EU referendum, with the possibility of imminent monetary loosening weighing on sentiment. Consequently the GBP EUR exchange rate was trending lower in the region of 1.1811.
The GBP EUR exchange rate was also left trending lower as the UK’s Services PMI slipped from 53.5 to 52.2, a lower result than forecast. The data was compiled in June, largely before the EU referendum, so it’s likely the rate of output is going to be even lower in July.
According to Markit economist Chris Williamson: ‘A further slowing, and possible contraction, looks highly likely in coming months as a result of the uncertainty created by the EU referendum. However, with the June PMIs having already fallen into territory that would normally be associated with the Bank of England cutting interest rates, it’s unlikely that policymakers will wait for more data before unleashing additional monetary stimulus. More policy action is therefore likely in the coming weeks.’
(Previously updated at 17:00 on 04/07/2016)
GBP EUR Exchange Rate Strengthened Thanks to Euro Weakness
While candidates for the Conservative leadership argued over the ability to guarantee the rights of EU citizens already living in the UK the mood of markets nevertheless picked up. With the US markets closed for Independence Day and the Euro (EUR) weighed down by domestic worries the Pound (GBP) returned to an uptrend towards the close of Monday’s European session. As a result the GBP EUR exchange rate trended higher in the region of 1.1945.
(Previously updated at 10:44 on 04/07/2016)
Even though the week did not get off to the strongest start for the UK economy the GBP EUR exchange rate remained on a stronger footing thanks to rising concerns over the Italian banking sector.
Pound Extended Losses versus Euro despite Osborne Dropping Surplus Target
In spite of a stronger-than-expected UK Manufacturing PMI the appeal of the Pound (GBP) remained largely muted ahead of the weekend. While the June figure climbed bullishly from 50.1 to 52.1, the measure was collated ahead of the EU referendum result, reducing the impact of this positive showing significantly. As concerns remained heightened over the ongoing fallout from the vote for Brexit, both political and economic, Sterling continued to slide across the board. This lack of confidence was compounded further by Chancellor of the Exchequer George Osborne’s decision to abandon his target of achieving a budget surplus by 2020; a move which failed to encourage investors in the midst of the post-referendum anxiety.
Generally the Euro (EUR) was in weak shape on Friday, with markets deterred by the likely spill-over impact of the UK’s decision to leave the EU, which could weigh heavily on the Eurozone economy. Nevertheless, the finalised raft of Eurozone Manufacturing PMIs for June pointed towards greater robustness within the currency union, as the figures showed an unexpected upwards revision. This offered some hope that the domestic economy could weather the negative implications of Brexit and diminished confidence, with the single currency also benefitting from the weakness of its close rival.
Poor UK Construction PMI Failed to Weigh Down Pound as Worries Mount over Italian Banks
Even so, some measure of optimism helped to buoy the Pound up on Monday morning, pushing the Pound to Euro (GBP/EUR) exchange rate away from its recent multi-year lows. This seems to have been at least partly in response to George Osborne’s latest suggestion that corporation tax could be slashed in order to encourage continued international investment in the UK economy. However, as the latest UK Construction PMI severely disappointed expectations this soon saw Sterling ceding ground across the board once again. Clocking in at 46.0 rather than 50.7, the lowest reading since September 2009, the measure indicated that the domestic construction industry was in trouble even before the UK voted in favour of Brexit.
Sentiment towards the Euro remained weak, meanwhile, with concerns mounting over the outlook of the Italian banking sector. Worries over bad debts had been dragging on the Italian economy even before the UK’s referendum, with the fallout of the Brexit vote crystallising these fears. Although Italian Prime Minister Matteo Renzi has indicated a willingness to step in and bail the banks out in the event of a collapse, this has not encouraged investor confidence; not least because it would breach European banking and state aid rules.
GBP EUR Exchange Rate Forecast: Positive UK Services PMI Could Boost Pound Demand
Tomorrow’s Bank of England (BoE) Financial Stability Report is likely to provoke further volatility for the GBP EUR exchange rate, with investors wanting to get further indication of the central bank’s thinking on Brexit-based risk. Also of interest will be the June Services PMI, which could boost the Pound if the major driver of the domestic economy shows continued signs of strength. As researchers at BBH noted:
‘This week’s data, the June service (and construction) PMI and May industrial production will be helpful in setting the base case ahead of this (potential) shock. The important takeaway is that the UK economy appears to have lost some momentum in Q2, but in terms of pace of growth, peaked in 2015, well before the referendum became an issue.’
Demand for the single currency, on the other hand, could strengthen in response to the latest Eurozone Retail Sales figures. If consumer confidence is indicated to have improved in May this would seem to point towards a wider improvement of sentiment within the currency union. So long as markets continue to dismiss the likelihood of the European Central Bank (ECB) introducing further easing measures in the near future the Euro is likely to remain on a stronger footing against the Pound.
Current GBP, EUR Exchange Rates
At the time of writing, the Pound to Euro (GBP EUR) exchange rate was trending higher around 1.1943, while the Euro to Pound (EUR GBP) pairing was slumped in the region of 0.8373.