- Pound Euro Exchange Rate Near 1.13 – ECB minutes keep pressure on pair
- Peter Praet: Too Early to Stop Eurozone Stimulus – ECB official dampens QE withdrawal hopes
- UK Services Disappoint – Report falls slightly below expectations
- Forecast: Investors Await More Central Bank News – UK trade stats due Friday
Pound Euro Exchange Rate Dips after ECB Minutes
Thursday saw the publication of the European Central Bank’s (ECB) latest meeting minutes, in which the bank dropped a notable phrase about the possibility of expanding or extending policy stimulus.
As a result, market hopes that the ECB could begin to discuss withdrawing its quantitative easing (QE) program increased, despite dovish comments from officials this week.
Euro trade was also given a boost by news that the European Union and Japan had reached a deal on a major free-trade agreement.
Sterling saw mixed movement on Thursday. This week’s UK data has failed to support the British currency, but if Friday’s UK trade stats impress, EUR GBP could end the week closer to its opening levels.
[Previously updated 13:00 BST 05/07/2017]
Despite a disappointing UK services PMI, the Pound Euro exchange rate saw volatile movement during Wednesday’s European session.
A lack of market confidence that the European Central Bank (ECB) would be tightening Eurozone monetary policy in the foreseeable future has weighed on the otherwise strong Euro.
Britain’s June services PMI was forecast to slow from 53.8 to 53.5, but came in slightly lower than expected at 53.4. This weighed on market hopes that the Bank of England (BoE) could become more hawkish in the second half of the year.
[Published 07:00 BST 05/07/2017]
After dipping slightly on Monday, the Pound Euro exchange rate trended near the week’s opening levels again on Tuesday afternoon. The Euro was weakened slightly by the latest comments from European Central Bank (ECB) chief economist Peter Praet.
GBP EUR began this week trending in the region of 1.1400 and has since trended within a tight range between 1.1417 and 1.1379. The pair continued to trend near 1.1400 at the end of Tuesday’s European session.
Pound (GBP) Limp as Investors Await Services PMI
This week’s UK ecostats have been underwhelming so far and sparked further speculation that Britain’s political situations have begun to negatively affect the domestic economy. As a result, the Pound has seen poor performance.
Markit published its June UK manufacturing PMI on Monday, which fell short of expectations with a result of 54.3 – well below the expected 56.5.
The construction PMI also disappointed on Tuesday, slowing from 56 to 54.8 and missing the projected result of 55.
While the construction print is typically low-influence, analysts did take the opportunity to point out that Britain’s private sectors appeared to be suffering from uncertainty.
Paul Trigg from Euler Hermes argued that builders are feeling anxious about the prospects of finding workers during and following the Brexit process;
‘Migrant workers are the lifeblood of the sector and while the plan to provide more than three million EU citizens permanent residence is a good start, the ongoing movement of labour within the bloc is still a huge issue. Its loss will have a profound impact across the industry’s supply chain and profitability, so it’s unsurprising to see construction businesses urging the government to secure a transition deal with the EU at the very least.’
Other analysts have suggested that businesses are hesitant to invest, amid the possibility that the new minority Conservative government will not last in the long-term. Some still predict that there could be another general election in the coming year.
Markit’s chief business economist, Chris Williamson, has noted that confidence among workers in both the manufacturing and construction sectors are down.
Euro (EUR) Fails to Capitalise on Pound Weakness
The Euro continues to be held back by mixed bets on the European Central Bank’s (ECB) monetary policy outlook, despite strong Eurozone ecostats published in recent weeks.
Last week, ECB President Mario Draghi’s comments led to a surge in ECB tightening bets. Draghi indicated that the bank may need to discuss the appropriate way to withdraw its aggressive quantitate easing (QE) program later in the year.
However, ECB sources were careful to warn markets that the bank was not committed to any changes in policy, and some analysts continue to forecast that ECB policy will be left alone until next year.
ECB chief economist Peter Praet further dampened tightening bets on Tuesday, when he argued that it was still too early to stop the bank’s stimulus measures. He stated;
‘But our mission is not yet accomplished. We need patience and persistence. We need to be patient, because inflation convergence needs more time to show through convincingly in the data. The Euro area’s economic environment is improving, and the fat negative tail to inflation expectations, which was so visible at the start of our asset purchase programme, has virtually disappeared.’
Pound Euro Exchange Rate Forecast: UK Services Data Ahead
Wednesday’s most notable publication will be Markit’s UK services PMI from June, which will give Pound investors a better idea of how Britain’s biggest private sector performed at the end of the second quarter.
Sterling may not see much shift in direction if the results slip from 53.8 to 53.5 as analysts have forecast, but the highly influential report could definitely cause some Pound movement if it comes in worse or better than expected.
If it comes in short of expectations, markets will become increasingly concerned that Britain’s economy is being dented by the household pay squeeze. This would dampen hopes of economic resilience and lead to a drop in BoE tightening bets – and a weaker Pound outlook.
The opposite is true too. If services beat expectations, investors will become more confident that the economy could remain resilient in the second half of the year and boost the chances of the BoE withdrawing some of its stimulus measures.
As for the Euro, Wednesday’s Eurozone data includes Markit’s services and composite PMIs from June, as well as May’s retail sales results. Any further comments from ECB officials throughout the week will also influence the Pound Euro exchange rate.