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Pound to Euro Exchange Rate Holds Away from Lows despite Slowing UK Manufacturing Activity

Pound to Euro Exchange Rate Fluctuates as Investors Anticipate More Notable Data

While some important manufacturing stats from December were published on Tuesday, they had little impact on the Pound to Euro (GBP/EUR) exchange rate outlook and investors continue to anticipate some more highly influential data due later in the week.

Pound Sterling’s (GBP) strength was limited on Tuesday as investors reacted to Markit’s UK manufacturing report, which fell slightly short of forecasts that it would come in at 58. The index slowed from 58.2 to 56.3 in December.

Despite this though, analyst response was generally optimistic. They noted that there wasn’t really much reason to sell the Pound on this figure, as while it fell short of expectations it was still impressive overall for the UK manufacturing sector.

Due to the recent strong performance of the UK manufacturing sector, as well as hopes that the sector will continue to see solid performance if Brexit negotiations go smoothly, Sterling has held its ground and avoided major losses against the sturdy Euro (EUR).

Euro (EUR) Exchange Rates Supported by Hopes for Stronger Eurozone Inflation

Similarly, the Euro’s movement was little-affected by Eurozone manufacturing stats on Tuesday, which were mixed but generally highly impressive.

December’s manufacturing prints from Spain, Italy and France all fell short of projections, but the indexes remained at impressively high levels and the overall Eurozone manufacturing index still improved from 60.1 to 60.6 as forecast.

Despite the solid report, the Euro’s recent strength has more to do with the 2018 outlook for the currency and the Eurozone than domestic manufacturing data.

Investors are hoping for another strong year of Eurozone growth, and there is speculation that the European Central Bank (ECB) could fully unwind its quantitative easing (QE) package before the year ends.

Hopes of a potentially more hawkish ECB were bolstered last week, when Germany’s December inflation projections beat expectations. German inflation is now expected to come in at 1.7% in December, rather than fall from 1.8% to 1.5%. This left the Euro even more appealing.

Pound to Euro Exchange Rate Forecast: Eurozone Inflation Data in Focus

The Pound to Euro exchange rate is likely to see more notable movement towards the end of the week, when influential UK and Eurozone data will be published including UK services data and the Eurozone’s December inflation projections.

Britain’s December services PMI from Markit will be published on Thursday and analysts currently expect the index to have risen from 53.8 to 54.1. As the services sector makes up a notable portion of Britain’s economy, a better-than-expected services report would boost the Pound outlook.

However, some analysts, such as Rabobank’s Jane Foley, have pointed out that some investors may be hesitant to move much on the Pound until there are further developments on how Brexit negotiations may look in 2018;

‘I get the sense with Sterling that there is a ‘wait and see’ attitude,

We all know that Brexit remains an enormous theme for Sterling, particularly the start of the trade talks, and the market does need to wait to gauge the tone of those talks.’

Perhaps the biggest focus this week for Pound to Euro exchange rate investors will be the Eurozone’s December inflation projection, which will be published on Friday and could improve the Euro outlook if it beats expectations.

German employment stats will be published this morning and Markit’s services PMIs for the bloc will come in tomorrow, but the Euro is unlikely to see significant movement unless inflation data surprises markets.

Eurozone inflation is currently forecast to slip from 1.5% to 1.4% year-on-year. If it prints above predictions, speculation will rise that the European Central Bank (ECB) could tighten Eurozone monetary policy faster than markets currently expected. This would lead to stronger Euro demand.