Pound Euro (GBP/EUR) Exchange Rate Sheds Ground as UK Manufacturing Decline Worsens

January 2, 2020 – Written by Frank Davies

Pound Euro (GBP/EUR) Exchange Rate Slips as UK Manufacturing Contraction Deepens

A slight upward revision to December’s UK manufacturing PMI was not enough to prevent the Pound Sterling to Euro (GBP/EUR) exchange rate from sliding on Thursday.

In spite of the slight upgrade from its initial reading the index still hit its second-lowest reading since 2012, highlighting a sustained slowdown within the manufacturing sector.

With manufacturing still sat in a state of contraction investors saw little cause for confidence in the wider outlook of the UK economy, even though the sector only accounts for a small fraction of growth.

Market anxiety over Brexit also put a dampener on the GBP/EUR exchange rate with less than a month left before the UK is due to depart the EU.

Sustained Eurozone Manufacturing Slowdown Limits Euro Appeal

Demand for the Euro, meanwhile, also weakened in response to the finalised set of Eurozone manufacturing PMIs.

As the sector delivered its eleventh consecutive month of contraction this put renewed pressure on the single currency.

Investors were particularly disappointed by the continued decline of the German manufacturing sector, which saw the weakest performance of the Eurozone nations.

All in all, this suggests that the risk of a fourth quarter growth slowdown remains, with markets wary of the potential for Germany to slip into a state of recession.

Rising German Inflation Set to Shore up EUR Exchange Rates

EUR exchange rates may find a rallying point on Friday, however, with the release of the latest German consumer price index report.

Forecasts point towards a solid improvement in the headline inflation rate, which is expected to strengthen from 1.1% to 1.4% on the year.

While this would still fall some way short of the European Central Bank’s (ECB) 2% inflation target any solid uptick in inflationary pressure could still boost demand for the Euro.

As long as price pressures appear to be moving in the right direction the risk of further ECB monetary loosening looks set to weaken, to the benefit of the single currency.

Signs of Weakening UK Borrowing Forecast to Weigh on Pound

Support for the Pound could weaken further ahead of the weekend, on the other hand, if November’s UK consumer credit and mortgage approvals figures fail to impress.

Any deterioration in household borrowing would suggest that the impact of Brexit-based uncertainty was still being felt, encouraging a greater sense of caution.

Unless the data points towards a greater level of resilience among UK consumers worries over the health of the wider economic outlook are likely to persist.

The negative nature of December’s UK construction PMI could also put a fresh dampener on the GBP/EUR exchange rate.

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TAGS: Pound Euro Forecasts