GBP EUR Exchange Rate Surges Higher on Hopes of Stronger Second Quarter UK Growth

June 5, 2018 – Written by James Fuller

A better-than-expected UK services PMI encouraged the Pound Euro (GBP/EUR) exchange rate to push higher on Tuesday, driven by improved confidence in the outlook of the domestic economy.

Investors took encouragement from signs that the economy has bounced back from the weakness seen in March, boosting bets that the slowdown was only transitory in nature.

This suggests that growth in the second quarter could improve significantly on the anaemic 0.1% growth seen in the first three months of the year.

While Eurozone retail sales strengthened 1.7% on the year in April as forecast this was not enough to shore up the Euro, meanwhile.

As the finalised raft of Eurozone services and composite PMIs point towards a loss of economic momentum within the currency union the mood of EUR exchange rates naturally soured.

Signs of Stronger Second Quarter UK Growth Boost Pound Sterling Exchange Rates

With confidence in the prospect of a stronger second quarter UK gross domestic product reading boosted the Pound pushed higher across the board.

The positive nature of the headline services PMI also prompted fresh bets that the Bank of England (BoE) could raise interest rates in August.

As James Knightley, Chief International Economist at ING, commented:

‘With the manufacturing and construction surveys having also come in a little ahead of expectations, the overall composite index stands at 54.5, which is the highest reading since last December.

‘In what was a poor quarter for growth globally, the UK stood out as one of the big underperformers in 1Q, posting an expansion of just 0.1% quarter on quarter. Markit, the compiler of the PMI surveys, suggests the latest composite readings are consistent with growth of 0.3%-0.4% in 2Q18. Overnight spending data from the British Retail Consortium and Barclaycard are also consistent with an improvement in growth, boosted by better weather.

‘As such these data releases keep the prospect of an August rate hike firmly on the table. But, if they do indeed go for it, we doubt it will be followed quickly with additional hikes given the economic threats from rising fuel costs, stagnant real wages, Brexit uncertainty and a reluctance amongst firms to invest in the UK.’

Even so, some of the underlying details of the services PMI appear rather less positive in nature.

Concerns remain that the economy could come under additional pressure in the month ahead as Brexit-based uncertainty mounts, given weaker levels of new orders growth across all three sectors.

Commentary from BoE policymakers over the coming days could provoke additional volatility for the GBP/EUR exchange rate.

Any signs that the Bank is considering an imminent interest rate hike are likely to set the Pound on a fresh bullish run against its rivals.

Weaker Eurozone PMIs Offer Support to GBP/EUR Exchange Rate

As signs continue to point towards a loss of momentum within the Eurozone economy the appeal of the Euro has weakened.

Weaker levels of economic growth are likely to keep the European Central Bank (ECB) in a more dovish mind-set with regards to monetary policy, pushing back the prospect of any interest rate hike.

Unless May’s Eurozone retail PMIs and the German construction PMI print positively the mood towards the single currency is likely to deteriorate further.

As the retail sector has shown signs of struggling in recent months another weak showing here could encourage investors to continue piling out of the Euro.

On the other hand, any signs of improvement would give EUR exchange rates fresh cause for confidence, at least in the short term.

A bullish US Dollar may keep the Euro on a softer footing if fears over the prospect of a US-EU trade war start to pick up once again.

Political jitters remain a threat to the single currency, offering potential support to the GBP/EUR exchange rate.

Comments from ECB policymakers could also put pressure on EUR exchange rates this week if they adopt a more cautious tone on the economy and monetary policy.

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TAGS: Pound Euro Forecasts