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Pound Euro (GBP EUR) Slides Amid Political Uncertainty and Disappointing UK Data

  • Pound Euro Slides to 1.1284 Euro Pound Climbs to 0.8860
  • Markets Fear a Leadership Challenge from Boris Johnson – Pound Sterling Hindered by Uncertainty
  • UK Construction PMI Disappoints – Pound Falters
  • Eurozone Producer Prices Beat Forecasts Euro Bolstered

The Pound Euro exchange rate faltered this morning as markets responded to fresh political uncertainty in the UK as well as a disappointing UK construction PMI.

IHS Markit revealed that a measure of construction activity in the UK dropped to 48.1 in September, down from the 51.1 print in August and significantly lower than the market forecast of 51.

Any reading above 50 signifies growth – any reading below 50 signals contraction, making this the first contraction within the construction sector in over a year and indeed the fastest decline in output since July 2016.

This disappointing reading was predominantly due to a sustained drop in new work, accompanied by an overall lull in business optimism (the second lowest it’s been since April 2013) and a severe depreciation in civil engineering and commercial development work.

This news followed yesterday’s disappointing UK manufacturing print and heightened concerns that the UK’s economy may be decelerating.

This is all the more notable considering that Bank of England (BoE) Governor Mark Carney has asserted that a rate hike in 2017 is highly dependent on the underlying strength of the UK’s economy – something that markets have come to increasingly question.

GBP Exchange Rates Lower as Boris Undermines PM Theresa May

UK Foreign Secretary Boris Johnson has caused quite a stir with the publication of four ‘red lines’ that he insisted will not be crossed during Brexit talks.

Investors became spooked as some of these points went beyond the delicate positions established by UK Prime Minister Theresa May in her Brexit speech in Florence, causing many to accuse Boris of destabilising the government and acting in outright disloyalty to the PM.

Beyond this, many are considering the possibility that Boris is on the verge of contesting for leadership of the Conservative Party, a possibility that would spell even more uncertainty and provoke even more investor anxiety.

May has, however, now dispelled such claims, defending her decision not to fire Boris by asserting that not being surrounded by ‘yes men’ is a sign of strength.

This news did little to prevent Pound Euro’s fall.

Eurozone Producer Price Growth Beats Forecasts – EUR Bolstered

Producer Prices within the Eurozone demonstrated significant growth in August by rising 2.5% year-on-year in comparison to the 2% rise recorded in July and the forecast of 2.3%.

These gains were chiefly due to a 3.4% jump in energy prices, as well as a 2.5% rise in non-long-lasting consumer goods and a 3% climb in intermediate goods.

These figures are notable in that producer prices track inflation from the perspective of manufacturers and producers, thus the readings are useful for policymakers in determining potential changes in future price growth.

Because of this, the market reaction to such a jump has been positive, as not only does it indicate that the Eurozone’s economy seems to be on a strong footing, it also indicates that inflation in the Eurozone could potentially pick up, thus eventually prompting an interest rate hike from the European Central Bank (ECB).

Pound Euro Forecast: Sterling Liable to Remain Under Pressure

The forecast for GBP EUR remains somewhat gloomy following yesterday’s and today’s disappointing Markit releases.

Tomorrow’s key events will be a whole host of Markit PMI releases for the Eurozone, as well as the UK services and composite PMI’s (followed shortly by the Eurozone retail sales figures).

If the UK services sector reports similar pessimism and deceleration in growth then GBP EUR could fall even further.

Markets will also be keen to hear this afternoon’s talk from Boris Johnson at the Conservative conference in Manchester.

If Boris uses the platform to reinforce his arguments regarding Brexit then the markets will likely become even more apprehensive about the possibility of a fracture developing in the Conservative party.

If, however, he uses the opportunity to try and assuage fears and re-assert his loyalty to May then GBP EUR could find some breathing room.