GBP EUR Exchange Rate Gains Ground as Eurozone PMIs Reveal Signs of Slowing Growth

July 24, 2018 – Written by Frank Davies

Support for the Pound Sterling Euro (GBP/EUR) exchange rate picked up somewhat on Tuesday, largely thanks to a disappointing round of Eurozone PMIs.

While the Eurozone manufacturing sector showed signs of increased momentum this was counterbalanced by a disappointing performance from the service sector.

As a result, the composite PMI dipped from 54.9 to 54.3 in July, suggesting that the currency union got off on a weaker start in the third quarter.

However, as the details of the latest CBI business optimism index indicated that sentiment within the UK economy remains muted the Pound struggled to fully capitalise on the softness of the Euro.

Pound Euro Exchange Rate Benefits as Eurozone PMIs Highlight Slowing Growth

Although the German economy continued to perform well in July this was not enough to offer any particular support to EUR exchange rates.

Investors were discouraged by evidence that export growth is weakening in response to global trade tensions, which are likely to continue dragging on markets for some time to come.

This suggests that the Eurozone economy may struggle to recover the strong levels of growth seen in 2017, limiting the appeal of the Euro.

Commenting on July’s Eurozone composite PMI, Chris Williamson, Chief Business Economist at IHS Markit, noted:

‘The flash PMI suggests the Eurozone started the second half of the year on a relatively soft footing, indicative of GDP growth slowing in the third quarter. The July reading is consistent with quarterly GDP growth of 0.4%, down from a 0.5% expansion indicated by the surveys for the second quarter.

‘The renewed slowdown comes as a disappointment, confirming suspicions that June’s rebound was temporary, largely due to businesses in some countries making up for an unusually high number of public holidays in May.

‘Given the waning growth of new business and further slide in business optimism, the outlook has also deteriorated, notably in manufacturing, where the surveys saw worries about trade wars intensify markedly in July.

‘While there are signs that improving domestic demand in many countries is helping drive robust service sector expansion and support manufacturing, a worsening picture for export growth is clearly having an increasingly detrimental effect on manufacturing.

‘The big question going forward will be the extent to which domestic demand can remain sufficiently resilient to cushion the Eurozone economy from the potential adverse impact of an escalating trade war on exports. For now, the health of domestic demand seems encouragingly solid, but any feedthrough of trade worries to other sectors will be a key area of concern to an already cloudier-looking outlook.’

As markets brace for Thursday’s European Central Bank (ECB) policy meeting the mood towards the Euro looks set to remain rather bearish.

However, if ECB President Mario Draghi takes a more optimistic tone in comments to the press this could encourage EUR exchange rates to rally sharply.

Any signs that the central bank is on course to raise interest rates sooner rather than later in 2019 are likely to give the single currency a solid boost against its rivals.

GBP EUR Exchange Rate Upside Limited by Weaker Odds of BoE Rate Hike

Comments from Bank of England (BoE) deputy governor Ben Broadbent put further doubt on the prospect of an August interest rate hike.

As Broadbent indicated that he is still undecided as to whether to vote for a rate hike or not this gave investors fresh reason to sell out of the Pound.

Even so, this failed to keep the GBP/EUR exchange rate under pressure as confidence in the single currency deteriorated.

Tomorrow’s BBA loans for house purchase data could offer more in the way of support for the Pound, providing the housing market shows signs of strength.

Any weakness would leave GBP exchange rates vulnerable to renewed downside pressure, with confidence in the outlook of the UK economy still rather muted.

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TAGS: Pound Euro Forecasts