Homepage » Brexit » Pound Euro Weaker Despite European Central Bank (ECB) Uncertainties

Pound Euro Weaker Despite European Central Bank (ECB) Uncertainties

  • Pound Euro Exchange Rate Remains Near 1.13 – Pair tumbles closer to 1.12 however
  • Pound Outlook Lower – Euro benefits from poor UK ecostats
  • UK Trade Data Disappoints – Pound drops on Friday
  • EUR Forecast: Investors Await ECB Comments – Forward guidance will impact Euro

Pound Euro Exchange Rate Tumbles Friday

The Pound Euro exchange rate plunged on Friday after trending flatly for most of the week, due to a slew of underwhelming UK ecostats.

Britain’s manufacturing production results came in at -0.2% month-on-month and 0.4% year-on-year despite being projected to grow by 0.5% and 1% respectively.

Industrial production contracted in both monthly and yearly prints, while construction output contracted year-on-year.

The Euro continued to benefit from the week’s strong Eurozone ecostats, as well as rising speculation that the European Central Bank (ECB) may be preparing to discuss withdrawing its stimulus measures.

[Previously updated 12:47 BST 07/07/2017]

After holding its ground for most of the week, the Pound Euro exchange rate tumbled on Friday morning following the publication of Britain’s latest trade, manufacturing and industrial production results. GBP EUR was trending near a weekly low of 1.1297 at the time of writing.

The day’s UK ecostats have continued to indicate that economic activity in Britain is slowing and may not be able to support tighter monetary policy from the Bank of England (BoE) in the foreseeable future.

Britain’s trade deficit deepened from -£2.12b to -£3.07b in May. Manufacturing production and industrial production both saw unexpected month-on-month contractions in May while industrial production contracted at -0.2% year-on-year.

[Previously updated 16:57 BST 06/07/2017]

The Pound Euro exchange rate dipped on Thursday afternoon, briefly hitting a weekly low of 1.1346 as Euro traders reacted to the European Central Bank’s (ECB) latest minutes report.

The minutes dropped key, long-standing phrasing that mentioned the possibility of expanding or extending the bank’s stimulus program if necessary. This increased market hopes that the bank may be ready to talk about withdrawing the stimulus program in the coming months.

News that the European Union had agreed to a free-trade deal with Japan also supported the shared currency. European Council President Donald Tusk noted that he hopes the treaty will be in place by early 2019.

Friday will see the publication of Britain’s May trade balance update, which could influence the Pound’s late-week movement slightly.

[Published 06:00 BST 06/07/2017]

The Pound Euro exchange rate saw little change in direction on Wednesday despite Britain’s underwhelming June services PMI. A lack of European Central Bank (ECB) hawkishness has limited the Euro’s strength and allowed Sterling to hold its ground.

GBP EUR began the week trending at the level of 1.1400. The pair has trended within a relatively tight range between highs of 1.1417 and lows and 1.1355 but generally trends close to the week’s opening levels.

Pound (GBP) Outlook Dips as Economic Concerns Grow

The Pound outlook has worsened this week as Markit published a hat-trick of worse-than-expected UK PMIs from June.

Brexit and other political uncertainties have caused a notable slowdown in business investment according to Markit’s manufacturing and construction reports, while rising inflation and slowing wage growth have had a negative effect on Britain’s services private sector.

The services sector makes up a considerable portion of the UK Gross Domestic Product (GDP) and as a result the weaker than expected services PMI worsened concerns that Britain’s economy will not be as resilient as hoped in the second half of 2017.

Services were forecast to slip slightly from 53.8 to 53.5 in June, but slipped to 53.4.

Markit’s chief economist, Chris Williamson, noted that improvements in some areas have been unable to offset slowing consumer activity due to Britain’s pay squeeze;

‘There are pockets of growth, notably in financial services and business services, but the overall picture is one of business spending, investment and exports failing to provide sufficient impetus to fully offset the consumer slowdown.

Given the deterioration in the forward-looking indicators, such as business optimism and order book growth, the risks are tilted towards the economy slowing in the third quarter.’

Markit also noted that business optimism in Britain was at its lowest level since December 2011, citing Brexit negotiations and general political uncertainty.

Some analysts were unsurprised that the services data failed to meet expectations. Howard Archer from the EY ITEM Club said Britain’s economy was ‘already fragile’.

‘Following on from weaker manufacturing and construction surveys, the softer services PMI points to an already fragile economy struggling in June as heightened uncertainties about the UK outlook fuel business and consumer caution.’

However, the services report did come in comfortably above the 50 point mark separating contraction and growth.

As a result of this and a lack of fresh Euro demand, Pound investors remain hopeful that services could pick up again in the coming months. This would bolster the chances of policy tightening from the Bank of England (BoE) in the second half of 2017.

Euro (EUR) Strength Limited by European Central Bank (ECB) Bets

This week’s Eurozone data has largely beaten expectations and has indicated that the Eurozone is seeing better-than-expected growth going into the second half of 2017.

The Eurozone’s composite PMI for June was expected to drop to 55.7, but only slipped from 56.8 to 56.3. According to Markit, this has put the Eurozone on track for a healthy 0.7% growth in Q2.

May’s Eurozone retail sales stats also beat expectations, rising to 2.6% year-on-year and to 0.4% month-on-month.

While the Euro would typically benefit from optimistic ecostats like these, market uncertainty about the European Central Bank’s (ECB) forward guidance has held the shared currency back.

Last week, ECB President Mario Draghi indicated that later in the year the bank may need to begin discussing the best way to dial back its aggressive quantitative easing (QE) program.

However, this week has seen ECB chief economist Peter Praet argue that it was still too soon to stop QE. Praet stated that the inflation uptrend would need to be much stronger before this is considered.

Pound Euro Forecast: Investors Hope for More ECB Comments

This week’s most influential ecostats ended up having a minimal effect on the direction of the Pound Euro exchange rate.

Markets are instead hungry for more information on the mid to long-term plans of the Bank of England (BoE) and European Central Bank (ECB).

As a result, while Thursday will see the publication of Germany’s construction PMI and the Eurozone retail PMI for June, investors are more likely to focus on the day’s ECB news.

ECB chief economist Peter Praet will be holding another speech on Thursday morning. If he hints that he may be willing to discuss reining in the bank’s aggressive stimulus measures within the next year, the Euro could see an increase in demand.

However, if he makes no comments on monetary policy or maintains his recent dovish tone, the Pound Euro exchange rate could continue to see flat trade.

Friday will see the publication of Britain’s May trade balance results. Industrial production stats from Britain, Germany and France will be published too, which may influence late-week Pound Euro exchange rate movement.