Sterling (GBP) Exchange Rates Climb on Rise in Manufacturing Export Orders and Hawkish BoE
The Pound Euro (GBP/EUR) exchange rate fluctuated on Thursday morning, briefly reaching a week-long high against the single currency before falling after a run of upbeat data releases from the bloc.
On the data front, the UK’s IHS Markit’s latest UK manufacturing PMI revealed a small contraction to 55.3 in January, down from December’s final reading of 56.2 and below market forecasts of 56.5.
This proved the weakest rate of expansion within the manufacturing sector since June 2017, with output growth slowing to a fresh six-month low.
In slightly better news, however, jobs in manufacturing were added at a faster pace than previously, and new export order inflows strengthened on the back of higher sales to clients in China, North America, the Middle East and Japan.
This trend in rising export orders to accommodate for increased foreign demand ultimately boded well for the Pound, helping to negate the overarching fall in the PMI reading.
Ruth Gregory, Economist at Capital Economics shared this sentiment, stating:
‘The fall in the UK manufacturing PMI in January suggests that growth has slowed a little at the start of the year. But the big picture is that the sector is still performing well by recent standards’.
Euro Area Manufacturing Remains Robust, Euro (EUR) Exchange Rates Climb
The Euro posted a strong performance on Thursday, bolstered by ongoing strength in the bloc’s manufacturing sector.
The IHS Markit’s Eurozone manufacturing PMI was confirmed at 59.6 in January 2018, matching the preliminary reading but falling slightly from December’s high of 60.6.
Whilst this does point to a slight slowdown in factory growth, it still remains one of the highest readings seen within the sector.
‘The Eurozone’s manufacturing boom continued in full swing’ said Chris Williamson, Chief Business Economist at IHS Markit.‘With higher costs being increasingly passed on to customers, the survey sends a warning signal for a potential rise in future consumer prices’.
The Pound Euro (GBP/EUR) exchange rate, whilst initially slow in responding to this news, soon shifted into the Euro’s favour as a result.
In other news European Central Bank (ECB) Chief Economist Peter Praet spoke in Frankfurt on Thursday, claiming that inflation in the Eurozone is still weak, thus the ECB needs to keep its stimulus measures in place.
This dovish outlook had very little effect on the Euro, however, with markets seemingly glad that Praet’s comments were simply a repetition of long-standing guidance from the bank.
GBP/EUR Exchange Rate Forecast: UBS Predicts Rate Hike in May
The Pound Euro (GBP/EUR) exchange rate could find further strength in the near-term, particularly if the latest BoE predictions prove true.
Mark Carney, Governor of the Bank of England (BoE) recently asserted that he expects UK economic growth to pick up next year, stating that as uncertainty around Brexit ebbs, investment will return.
‘I would expect that in 2018 we will see a pick-up in this economy all things being equal – strong global growth, greater uncertainty’.
Beyond this, Economists at the global financial services giant UBS have told clients that they believe the BoE will raise interest rates in May, a decision that would mark the second interest rate hike in months and effectively underline massive confidence in the UK’s economy.
UBS Strategist John Wraith surmised this perspective, stating:
‘While we still expect the Brexit process to generate strengthening headwinds for the UK economy for a considerable time, the stronger than expected outturn for Q4 GDP and the better momentum that the economy starts 2018 with as a result could give the MPC a window of opportunity to raise the bank rate by the middle of the year’.
This could be all the more likely if UK wage growth finally starts to increase – a prospect that Carney claimed could occur now that employment is close to saturation point.