Thursday’s UK construction PMI from Markit came in better than expected, offering the Pound to Euro exchange rate some support towards the end of the week.
UK construction unexpectedly improved from 52.2 to 52.5 in February despite being forecast to remain at 52.2.
However, this was unable to lift GBP EUR back up to the level of 1.17 as UK construction is relatively low-influence. Instead, the pair spent most of the day trending in the region of 1.16.
Friday, on the other hand, could see the biggest Pound to Euro movement of the week depending on the strength of Britain’s February services PMI from Markit.
As services make up most of Britain’s most important economic sectors, a better-than-expected services report could increase hopes that UK growth will remain solid throughout 2017. This could cause GBP EUR to regain some of its losses before the end of the week.
However, without a highly impressive UK services result, the Pound to Euro exchange rate is still likely to end the week well below its opening levels.
[Published 06:00 GMT 02/03/2017]
The Pound to Euro exchange rate trended relatively flatly near 1.17 on Wednesday afternoon as investors digested the morning’s UK manufacturing PMI from Markit.
GBP EUR briefly slipped down to 1.16 before edging higher.
Markit’s first UK PMI from February was expected to show that manufacturing slipped from 55.9 to 55.6. However, the figure fell to a lower-than-predicted 54.6.
Rob Dobson, senior economist from IHS Markit, commented on the manufacturing results;
‘The big question remains as to whether robust growth can be sustained or whether it will continue to wane in the coming months. The slowdown in new order growth and a drop in backlogs of work suggest output growth may slow further’
This unexpected slowing in Britain’s factory output was initially brushed over in favour of the day’s Brexit news.
However, analysts became concerned that this could mean Britain’s other sectors (including services) would also fail to meet expectations, leaving the Pound weaker towards the end of the day.
During Thursday’s session Markit will publish Britain’s construction PMI from February. Markit’s services and composite prints will be published on Friday.
Britain’s services sector provides the biggest contribution to UK Gross Domestic Product (GDP). In recent months the retail sector, a vital part of Britain’s services, has seen unexpected contraction due to surging consumer prices.
If UK retail continues worsening as investors fear it will, it could considerably slow the nation’s growth in 2017. Concern that February’s UK PMIs would all fail to meet expectations this week kept GBP EUR from recovering on the latest Brexit hopes.
On Wednesday morning, it emerged that the UK House of Lords looked likely to pass an amendment to the Brexit bill that would call for the UK government to secure the rights of EU nationals living in Britain as a condition for activating Article 50 and beginning the Brexit process.
The amendment was proposed by the opposition Labour party and already has the formal backing of a Conservative, a Liberal Democrat and a crossbencher Lord.
Leader of Labour Lords, Lady Smith, stated she believed the House of Lords was against using citizens rights to live in the UK as bargaining chips. She stated;
‘To continue to use people as bargaining chips in this way is not only shameful but could have a dire impact on the UK’s economy and essential services,
Confirming the rights of those EU citizens living in the UK can only be of benefit to our citizens worried about their future in EU countries but the government’s approach seems to be to sit back and wait for others to blink first.’
She has criticised the Conservative government’s stance that EU nationals’ rights will not be secured until the EU is able to secure the rights of UK nationals across the rest of the bloc.
If amendments to the Brexit bill are indeed passed through the House of Lords, this would send the debate back into the House of Commons – potentially meaning the activation of Article 50 could be delayed for a week or longer.
The day’s Eurozone data also pushed the Pound lower by strengthening demand for the Euro. Germany’s preliminary year-on-year February Consumer Price Index (CPI) results were especially impressive, rising from 1.9% to 2.2%, beating the expected 2.1%.
Germany’s key February employment results were solid. The number of unemployed persons was predicted to come in at -10k in February but instead printed a better than expected -14k drop.
On the other hand, the Eurozone’s final February manufacturing PMIs were not as good as hoped. While manufacturing beat expectations in Italy, factory activity dropped in Germany and France bringing the bloc’s overall manufacturing score down to 55.4, missing the expected 55.5.
The rest of this week’s Eurozone data has the potential to influence GBP EUR but the Pound is more likely to drive the exchange rate in reaction to Friday’s UK services PMI.
Thursday will see the publication of the Eurozone’s January unemployment rate and February yearly inflation projections.
Inflation especially will be in focus for EUR traders. If it beats expectations like Germany’s did it will increase hopes that underlying inflationary pressures in the bloc are improving and could bolster European Central Bank (ECB) tightening bets.