UK Services Fail to Meet Forecasts, Weakening Pound to Euro Exchange Rate
Monday’s UK services PMI report from Markit rounded off a trio of underwhelming January PMIs, and as a result the Pound to Euro (GBP/EUR) exchange rate was unable to recover any of the losses seen last week.
Despite briefly climbing from last week’s opening levels of 1.1391 to a high of 1.1466 last Thursday, GBP/EUR tumbled on Friday. The pair closed the week at the level of 1.1334, near the week’s lowest levels, and has since remained near those lows.
As well as Euro (EUR) strength, the Pound to Euro (GBP/EUR) exchange rate has been weaker since recent UK ecostats indicated that Britain’s economy was not as strong as expected in January.
Monday saw the publication of Markit’s January services PMI for the UK, which slowed from 54.2 to 53 rather than edging up to the forecast 54.3. This left Sterling (GBP) limp.
As last week’s UK manufacturing and construction PMIs also fell short of forecasts, the overall UK composite PMI was disappointing too. The figure fell from 54.9 to 53.5 rather than just slipping to the forecast 54.6.
According to Markit chief economist Chris Williamson;
‘While the fourth quarter PMI readings were historically consistent with the economy growing at a resilient quarterly rate of 0.4-0.5%, in line with the recent GDP estimate, the January number signals a growth rate of just under 0.3%’
Eurozone Data Continues to Support Euro (EUR) Exchange Rates
Demand for the Euro was little changed on Monday, as Eurozone data continued to indicate that the Eurozone’s economy continued to perform as or better than expected.
Markit’s final January Eurozone PMIs were published and came in better than projected in some key prints. Italy’s services PMI, for example, came in at 57.7 despite being forecast to only improve to 56.
The Eurozone’s services index improved from 56.6 to 58, beating the forecast 57.6, while the overall composite PMI advanced past the projected 58.6, from 58.1 to 58.8.
Markit’s Chris Williamson sounded hawkish about the European Central Bank (ECB) outlook in the PMI report;
‘The survey data are therefore indicating that the Eurozone has started 2018 with very good growth momentum, and that price pressures are building commensurately. If such impressive numbers continue to be seen in coming months, expect policymakers to sound increasingly hawkish.’
Bank of England (BoE) Uncertainties Weigh on Sterling (GBP) Exchange Rates
Part of the Pound’s strong performance early last week was due to rising hopes that the Bank of England (BoE) would take a more hawkish tone on monetary policy in the coming months, following the latest comments from BoE Governor Mark Carney.
Carney indicated in a speech that the bank would be refocusing on tackling Britain’s surging inflation. This caused bets of tighter monetary policy from the bank to rise.
However, investors are concerned that with recent UK data falling short of expectations, Britain’s economy may not be able to sustain tighter monetary policy.
Regardless, investors are highly anticipating this week’s BoE decision, with uncertainty over whether the bank will become more hawkish or maintain caution.
Pound to Euro (GBP/EUR) Forecast: Bank of England (BoE) Decision in Focus
With the Eurozone economic calendar quieter this week, upcoming Pound to Euro (GBP/EUR) exchange rate movement is likely to be influenced largely by UK news and the Pound.
Eurozone retail PMI data will be published on Tuesday, with Italian retail sales stats due on Wednesday, but the biggest focus for GBP/EUR investors this week will be Thursday’s Bank of England (BoE) policy decision.
The bank’s first policy decision of the year is expected to see the bank leave policy frozen, but any hints the bank makes about its 2018 outlook are likely to have a strong influence on Pound movement.
If the bank hints that it will be tackling high UK inflation despite the recent weak UK PMI data, the Pound is likely to strengthen towards the end of the week.
On the other hand though, if the bank expresses fresh concerns about Britain’s economy GBP/EUR could see further losses.
UK trade and production stats due for publication on Friday could also impact the Pound to Euro exchange rate this week.