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Pound Euro (GBP EUR) Stumbles on Disappointing UK Construction PMI

GBP EUR exchange rate outlook
  • Pound Euro Slides to 1.0862 – Euro Pound Climbs to 0.9205
  • UK Construction PMI Disappoints – Pound Stumbles
  • US Dollar Softens in Wake of North Korea Crisis – Euro Gains Traction

The Pound Euro exchange rate has fallen this morning in the wake of the UK’s August construction PMI and ongoing tension between the US and North Korea.

The IHS Markit/CIPS construction PMI for the UK demonstrated a fall to 51.1 in August, below July’s 51.9 and indeed well below market forecasts of 52. This was the lowest reading since August the previous year, as a significant drop in commercial work negated growth in house building.

Beyond this, new business volumes dropped for the second month in a row, whilst employment rose the least amount since July of 2016.

The market reaction to these figures was understandably negative, with Sterling quickly paring Friday’s gains against the Euro.

Euro Capitalises on US Dollar Weakness, Gains in Wake of North Korean Crisis

The Euro climbed this morning (despite a notable increase in Spanish unemployment) as the nuclear crisis with North Korea mounted once again.

North Korea tested its sixth and largest nuclear warhead yet over the weekend with experts estimating it to have an explosive yield of 120 kilotons. The hermit nation also declared that the device was, in fact, a hydrogen bomb – a type of weapon with greater damage dealing potential than the traditional atomic nuclear weapon (though there is no way of confirming this information).

This latest test was soon followed by news from South Korea that the North is preparing for even more missile tests – news consistent with Kim Jong Un’s statements the week prior.

Understandably the markets quickly became risk averse, whilst the US Dollar found itself floundering as markets favoured traditional safe-haven currencies like the Japanese Yen (JPY), the Swiss Franc (CHF) and, somewhat untraditionally, the Euro; a move perhaps hastened by last Friday’s mixed US data releases.

Whether this will continue, however, is yet to be seen, especially with the European Central Bank’s (ECB) September policy meeting taking place this Thursday – with volatility likely both during the build-up and the aftermath.

GBP EUR Forecast: ECB Policy Meeting and Big Data this Week

The most notable mover this week for this pairing is likely to be Thursday’s ECB policy meeting, though markets have recently come to question the likelihood that the Bank will, as previously anticipated, announce its plans to taper in its quantitative easing (QE) scheme.

According to Euro-area officials, the ECB might not have a final QE plan ready until December this year due to claims that the sheer complexity of the stimulus means that there will be little appetite to rush.

David Owen, Chief European Financial Economist at Jefferies, stated:

‘It makes a lot of sense for them to delay the definite decision until December. It will be interesting to see how the market takes this. As ever the market is impatient for news’.

Whilst the Euro has, so far, remained resilient to this news, as the meeting gets closer and closer we may see increasing volatility, especially if the US Dollar becomes favoured as a safe-haven once more.

The Pound to Euro exchange rate is also liable to fluctuate as a result of a number of UK and Eurozone Markit releases this week, with Friday featuring UK industrial production, manufacturing production, construction output figures and finally the UK’s trade balance; all liable to cause movement.

The final variable is, of course, the North Korean crisis. If escalations continue then markets could switch back to favouring the US Dollar; a more traditional safe-haven than the Euro. If things de-escalate, however, then the Euro could be afforded even more room to capitalise against the Pound.