Ahead of the weekend the Pound Euro exchange rate faltered, its bullish trend brought to an end by a disappointing Public Sector Net Borrowing result. GBP EUR had previously rallied in response to better-than-forecast UK retail sales results as investors took the report as a signal that UK consumers remained fairly confident in spite of the UK’s decision to Brexit from the European Union.
Up until now much of the UK’s ecostats have related to the pre-referendum period. Now that figures for July and August are beginning to emerge investors will have a better idea of what impact the historic vote has had on Britain and its core sectors of manufacturing, services and construction. Previous PMIs indicated that all three areas were seriously struggling even before the decision to Brexit and signs that output has slowed still further are likely to weigh on GBP demand.
- UK borrowing failed to dip as far as forecast – Pound knocked back as government looks set to miss 2016-2017 target
- German Producer Price Index encouraged Euro demand – Impact of Brexit vote on Eurozone economy appears to remain limited
- Lower BBA mortgage approvals forecast to weigh on Sterling – GBP EUR exchange rate likely to remain biased to the downside
- Fed rate hike speculation could diminish appeal of the single currency – Yellen comments set to provoke market volatility
GBP EUR Strengthened after City Survey Pointed Towards Greater Confidence
Limited trading volumes helped to benefit the GBP EUR exchange rate on Monday, allowing the Pound to return to more bullish form. Investors were generally encouraged by a survey undertaken by accountancy firm EY, which noted that the majority of City businesses were not particularly concerned about the potential negative impact of the Brexit vote. As a result the GBP EUR pairing was trending higher around 1.1606 towards the close of the European session.
(Previously updated at 14:44 on 22/08/2016)
As the European Central Bank (ECB) appears less likely to loosen monetary policy further in the near future investors have been encouraged to pile back into the Euro.
Disappointing UK Government Borrowing Figure Ended Pound (GBP) Bull Run
Even though the UK Public Sector Net Borrowing figure for July showed a surplus of 1.47 billion Pounds this was not received particularly well by investors. As July tends to be a solid month for tax receipts there had been hopes of a rather stronger showing, especially in light of the upside surprises evidenced by other post-Brexit data. Consequently the government appears to be on target to miss its borrowing target for the 2016-2017 fiscal year, a prospect that investors did not appreciate. This saw the Pound (GBP) weakening against rivals, with worries over the outlook of the domestic economy rising once again.
The Chief Secretary to the Treasury, David Gauke, said of the data; ‘With the public finances in surplus in July, our economy starts from a position of strength to face any economic turbulence following the vote to leave the EU. As we keep working to cut the deficit, we are well-placed to handle any challenges and seize the opportunities as our economy adjusts.’
While the US Dollar (USD) rallied strongly ahead of the weekend this did not prevent the Euro (EUR) from making some fresh gains against the Pound. The German Producer Price Index for July bettered expectations, offering further evidence that the Brexit vote has not had an overly detrimental impact on the Eurozone. As market risk appetite diminished investors were encouraged to continue favouring the single currency, particularly given the less dovish outlook of the European Central Bank (ECB).
Softer Mortgage Approvals Forecast to Dent GBP EUR Exchange Rate
The early week will see only limited UK data to provoke movement for the Pound, which could see the recent bullishness of the currency cool further with a lack of support. Expectations are not high for the CBI Industrial Trends Orders report, which is forecast to show a fresh decline from -4 to -6 in August. Renewed signs of Brexit-based pressure within the domestic economy could prompt the Pound Euro (GBP EUR) exchange rate to trend lower, with markets continuing to lack any particular reassuring certainty.
Volatility is also likely to accompany the BBA Mortgage Approvals figure for July. The UK housing market is thought to have slowed markedly in response to post-referendum uncertainty, something which could give markets further pause. As economists have stressed that other areas of the economy are likely to take longer to reflect the true impact of the vote worries remain over the future of the economy. Continued bearishness seems likely, as researchers at HSBC noted:
‘The sharp fall in GBP so far has simply been the market reacting to the UK’s vote to leave the EU. From here there should be an ongoing grind lower in GBP as the recent weakness is not enough to rebalance the UK economy.’
Euro (EUR) Predicted to Weaken on Increased Fed Rate Hike Bets
While the US Dollar is likely to remain on a stronger footing this may not weigh too heavily on the single currency. Instead investors are expected to focus on August’s raft of Eurozone PMIs, which will offer a fresh gauge of the health of the currency union’s economy. Forecasts point towards a modest uptick in the Eurozone Composite PMI, much of which is likely to remain driven by the relative strength of the German sectors. Even so, a stronger showing is predicted from the French economy with investors expecting to see the domestic Manufacturing PMI edge closer to expansion territory.
However, the lopsided nature of the currency union’s recovery could maintain downside pressure on the Euro. The health of the Italian banking sector remains a cause for concern, as do weaknesses within other member states. Even though the ECB expressed a willingness to hold off on further monetary loosening for the time being this is unlikely to encourage investors for long, particularly if the Fed looks more ready to raise interest rates imminently. Should comments from Fed Chair Janet Yellen boost the odds of a 2016 Fed rate hike then the GBP EUR exchange rate is expected to trend higher.