EUR to GBP Exchange Rate Climbs on Calming Political Jitters Despite Mixed Eurozone Data

June 4, 2018 – Written by Minesh Chaudhari

Despite some mixed Eurozone data in recent sessions and some slightly better than expected data from the UK, the Euro to British Pound (EUR/GBP) exchange rate has been climbing since markets opened this week. The pair could climb even further if Tuesday’s UK services PMI disappoints investors.

Eurozone political jitters caused EUR/GBP to fluctuate widely last week. Ultimately the pair slipped from the level of 0.8762 to 0.8736, but did touch on a monthly low of 0.8699 in the middle of the week. At the time of writing, EUR/GBP had recovered most of its weekly losses and trended near the level of 0.8758.

EUR Holds Ground Despite Signs of Lower Investor Confidence

On Monday, reports emerged suggesting that Eurozone investor confidence had been significantly knocked by recent Italian political jitters. Despite this though, the Euro saw relatively sturdy trade and was able to hold gains against the Pound.

Investor morale in the Eurozone slumped to its worst levels in 20 months – since October 2016 – due to anxiety about Eurozone politics and the possibility of a global trade war sparked by US protectionism.

According to Manfred Hübner from Sentix, the group that published the report:

‘The new government in Italy is causing great concern about the euro zone among investors.’

Sentix’s index has already fallen significantly since late 2017, indicating that investors had quickly shed the broad optimism in the Eurozone’s economic outlook seen for much of last year.

On the other hand, Italian 10-year bond yield movement has indicated that investors are becoming less concerned about the possibility that Italy may quit the Euro, as Euroscepticism was not a notable factor in Italy’s 2018 election.

In any case though, Italy’s new coalition government is a populist one and markets remain concerned about the government’s potential clashes with the EU over spending and migration.

There are likely to be persistent fears about the possibility that Italy will become more Eurosceptic under the populist government too.

Overall though, as the current state of Italian politics has calmed from the perceived crisis seen last week and another election is unlikely to take place soon, Euro jitters have faded and analysts predict the currency’s worst levels are behind it.

GBP Strength Limited as Investors Anticipate UK Services Report

Sterling demand has improved a little since last week, as some UK ecostats have beaten expectations and boosted market hopes that Britain’s economy is becoming a bit more resilient again, following a poor performance from the economy in Q1 2018.

UK consumer confidence beat forecasts in May according to Gfk’s survey, climbing from -9 to -7/ Britain’s manufacturing sector performed better than expected in May too, climbing from 53.9 to 54.4 rather than sliding to the forecast 53.5.

That trend appeared to continue this week, with Britain’s May construction PMI remaining at 52.5 rather than sliding to 52 as forecast.

However, Sterling remained relatively limp against the Euro. This was partially due to Britain’s economic outlook remaining gloomy. According to Sam Teague from IHS Markit, the latest construction data was not hugely optimistic in context:

‘Inflows of new business slipped back into decline, signalling the resumption of the downward trend in demand seen during the opening quarter. Companies frequently noted that Brexit uncertainty and fragile business confidence led clients to delay building decisions in May.

With new order books deteriorating and cost pressures picking back up, it’s not surprising to see construction firms taking a dimmer view of prospects and pulling-back on hiring, all of which makes for a shaky-looking outlook.’

EUR/GBP Forecast: UK Services and Eurozone Growth Results Ahead

Eurozone political jitters are likely to take a backseat in the coming sessions, and the Euro to Pound exchange rate seems set to spend most of the week reacting to economic data.

Tuesday will see the publication of what could be the week’s most influential dataset – Britain’s May services PMI from Markit.

As services make up most of Britain’s economic activity, a surprising services report would give investors a better idea of how Britain’s economy is performing in Q2 2018.

With markets highly uncertain about whether or not a Bank of England (BoE) interest rate hike is likely in the coming months, the services data could influence BoE bets.

UK services are forecast to have edged higher from 52.8 to 53, but as UK manufacturing and construction PMIs beat forecasts investors are hoping services will too.

Higher UK services figures would boost BoE rate hike bets and leave the Pound more appealing. This could make it difficult for EUR/GBP to continue its currency advance.

Eurozone retail sales will be published on Tuesday, but the Euro is more likely to strengthen if the Eurozone’s Q1 growth projections beat forecasts on Thursday.

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TAGS: Euro Pound Forecasts