- Stronger GfK Consumer Confidence boosted Pound – UK sentiment showed modest improvement in May
- Euro strengthened by surprise fall in German unemployment – Number of unemployed hit record low
- ECB forecast to leave policy unchanged at June meeting – GBP/EUR exchange rate predicted to weaken
- UK PMIs in focus – Manufacturing growth fails to boost the Pound
Pound Sterling (GBP) Continued Slump with Weaker UK House Prices
A larger-than-expected dip in Nationwide House Prices kept the Pound (GBP) on a downtrend on Wednesday morning, with demand for the currency still dented by referendum uncertainty. Consequently the Pound Sterling to Euro (GBP/EUR) exchange rate was trending lower in the region of 1.2983.
As the European session progressed the Pound Sterling to Euro (GBP/EUR) exchange rate extended losses, sliding 0.5% on the day’s opening levels, despite the UK’s Manufacturing PMI printing above forecast levels.
The gauge unexpectedly escaped contraction territory, but the figure still wasn’t particularly encouraging.
According to Senior Economist Rob Dobson; ‘The manufacturing sector continued its lacklustre start to 2016. Although key indicators for output, new orders and the headline PMI all ticked higher in May, the latest survey is still consistent with around a 0.8% quarterly decline in the official ONS Manufacturing Production Index.’
While Thursday’s UK Construction PMI is expected to remain unchanged from the figure recorded in April, Friday’s more influential Services PMI may show a modest improvement.
(Previously updated at 16:49 on 31/05/16)
Weak Eurozone Inflation Failed to Dent Euro (EUR) Exchange Rate
Confidence in the Euro (EUR) was not overly eroded by the news that the Eurozone had remained in negative inflation in May. The latest Consumer Price Index clocked in at -0.1% on the year, seeming to suggest that the European Central Bank’s (ECB) attempts to encourage greater inflationary pressure have failed.
Nevertheless, a poll indicating greater support for the ‘Leave’ campaign undermined the appeal of the Pound (GBP) further on Tuesday. As a result the Pound Sterling to Euro (GBP/EUR) exchange rate was trending lower in the region of 1.3060 towards the end of the European session.
(Previously updated at 14:13 on 31/05/16)
Profit Taking Weakened Pound Sterling to Euro (GBP/EUR) Exchange Rate
The Pound (GBP) lost some of its recent bullishness ahead of the weekend, as optimism regarding the EU referendum began to ease amidst a fresh round of profit taking. Investors were somewhat reassured to find that the UK GfK Consumer Confidence Survey for May had unexpectedly improved, ticking higher from -3 to -1. Although sentiment remained in negative territory this stronger showing helped to bolster the currency on Friday, with the Pound Sterling to Euro (GBP/EUR) exchange rate also benefitting from the relative weakness of the Euro.
Speculation over the policy outlook of the Federal Open Market Committee (FOMC) continued to put pressure on the single currency, as worries mounted over the possibility of further policy divergence between the Fed and the European Central Bank (ECB). However, the Euro regained some ground against rivals on Monday, thanks to a stronger-than-expected French first quarter GDP and improved German Consumer Price Index. Inflation in the Eurozone’s powerhouse economy ticked higher from -0.1% to 0.1% in May, raising hopes that slowdown pressures might not be as pronounced as previously feared.
Euro (EUR) Bullish after German Unemployment Rate Declines to Record Low
Eurozone data proved a little mixed on Tuesday morning, with German Retail Sales strengthening on the year but contracting on the month in April. This indicated that consumers were taking a more cautious approach to spending, suggesting that downside pressures were continuing to weigh on the domestic economy.
Nevertheless, the GBP/EUR exchange rate was soon prompted to trend lower by the latest raft of German employment data. While investors had anticipated that the Unemployment Rate would hold steady on the month in May markets were encouraged to find that the figure had instead dropped from 6.2% to 6.1%. As this was the lowest level of unemployment in Germany since the country’s reunification the appeal of the Euro was sharply boosted, encouraging hopes that the ECB will not loosen policy further in the near future. However, this stronger figure is unlikely to particularly bolster the wider Eurozone measure, due to persistent weakness in other member nations.
According to the head of the Federal Labour Agency;
‘The labour market continues to develop positively. Employment has grown strongly and demand for labour has increased significantly.’
GBP/EUR Exchange Rate Forecast: Euro Predicted to Strengthen due to Less Dovish ECB Meeting
Later in the week the Euro is likely to see some added volatility on the back of the ECB’s latest policy meeting, even though there are no expectations for policymakers to introduce further easing at this juncture. Members of the executive board have been expressing a decided ‘wait and see’ mentality in recent days, suggesting that the central bank will not act again until it has had a chance to assess the impact of March’s policy changes. Even so, markets could be inclined to buy into the Euro in the event of a higher inflation forecast, as Carsten Brzeski, Chief Economist at ING, noted:
‘While any increase in inflation forecasts on the back of higher oil prices is nothing more than technical normality, it could give rise to speculation about the timing of any ECB tapering. What is more, as such higher inflation forecasts would come at a time at which Fed hike expectations are again flaring up and at which market participants are well aware of German opposition to ultra-loose monetary policy. Nevertheless, in our view any kind of tapering speculations are premature.’
Demand for the Pound could pick up on Wednesday, meanwhile, if the May Manufacturing PMI is found to demonstrate further signs of strength. With referendum uncertainty hanging over the outlook of the domestic economy any improvement in sector growth would likely encourage investors to pile back into the softened currency. A stronger showing on Friday’s UK Services PMI would also be of support to the GBP/EUR exchange rate.
If the UK economy is proving resilient it would up the odds of the Bank of England (BoE) bringing forward its plans to increase interest rates, although any such plans will remain tenuous ahead of the UK’s EU referendum.
Although polls are currently putting the stay camp ahead, anything could happen over the next couple of weeks.
Current GBP, EUR Exchange Rates
At the time of writing, the Pound Sterling to Euro (GBP/EUR) exchange rate was trending lower around 1.3105, while the Euro to Pound Sterling (EUR/GBP) pairing was making gains in the region of 0.7631.