Pound Euro (GBP/EUR) Exchange Rate Surges Thanks to Leap in UK Business Optimism

January 22, 2020 – Written by Frank Davies

Surge in UK Business Optimism Fuels Pound Euro (GBP/EUR) Exchange Rate Leap

The Pound Sterling to Euro (GBP/EUR) exchange rate made strong gains on Wednesday, benefitting from a surprise return to positivity for the CBI business optimism index.

As the index leapt from -44 to 23 on the quarter this encouraged investors to pile back into the Pound as fears of a future slowdown diminished.

With businesses expressing a greater sense of optimism over the economic outlook in the wake of the December general election the GBP/EUR exchange rate jumped to a monthly best.

While the CBI industrial trends orders index remained in negative territory in January this was not enough to prevent the Pound pushing higher, with markets still confident in the prospect of stronger growth.

Softer French Business Sentiment Limits Euro Appeal

Weaker-than-expected French business confidence put a dampener on the Euro, meanwhile, as markets continued to bet on the prospect of a continued Eurozone slowdown.

EUR exchange rates may struggle to find any particular support ahead of Thursday’s European Central Bank (ECB) policy announcement, even though no change in policy is anticipated.

Any signs of greater caution among ECB policymakers could put the Euro under significant pressure, in spite of the limited scope for any further monetary loosening measures.

As long as the central bank looks set to maintain a neutral to dovish policy bias in the months ahead the potential for any EUR exchange rate recovery appears limited.

Underwhelming UK PMIs Set to Weigh on GBP/EUR Exchange Rate

Worries over the health of the UK economy may pick back up ahead of the weekend, however, if January’s flash manufacturing and services PMIs fail to impress.

With forecasts pointing towards another monthly contraction from the manufacturing sector the odds of a first quarter economic slowdown look set to rise.

On the other hand, evidence of greater resilience within the service sector could offer a fresh boost to the GBP/EUR exchange rate.

Markets expect to see the services PMI pick up modestly from 50 to 51 on the month, signalling a return to positive growth.

As the service sector remains the primary driving force of the UK economy any positive showing here could encourage the GBP/EUR exchange rate to hit a fresh one-month high.

Euro Vulnerable to Fresh Month of German Manufacturing Slowdown

Reaction to the latest German manufacturing PMI is likely to prove less positive, meanwhile, as forecasts point towards another month of weakness.

If the PMI slides deeper into contraction territory this could drive the Euro sharply lower across the board, given that the sector has already hit its lowest level of growth in years.

Unless the manufacturing sector decline appears to be bottoming out EUR exchange rates look set to slump.

As long as the Eurozone’s powerhouse economy remains on course for another slow quarter of growth any potential for Euro gains looks set to prove limited.

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TAGS: Pound Euro Forecasts