Thursday morning saw the Pound to Euro exchange rate advance as investors reacted to solid UK services data. However, the pair could quickly give up its recovery attempts if the Bank of England (BoE) becomes more dovish in today’s upcoming policy decision.
GBP EUR continues to trend in a tight region and has struggled to break through the level of 1.12 this week.
Pound (GBP) Gains Limited as Investors Await BoE News
The Pound has seen mixed movement against a sturdy Euro this week and has been unable to sustain any notable gains.
Sterling continued to trend within a relatively tight region against the Euro on Thursday, even as Britain’s key services PMI from Markit beat expectations.
The July services report was forecast to improve slightly from 53.4 to 53.6, but instead advanced to 53.8.
With both services and manufacturing better-than-expected in July, Britain’s composite PMI improved from 53.8 to a solid 54.1. The construction PMI has been largely brushed over.
However, Sterling’s PMI-related gains have been limited as investors are waiting for the Bank of England (BoE) to hold its August policy decision before making any big moves on the Pound.
In June’s meeting, three members of the BoE Monetary Policy Committee (MPC) voted to hike UK interest rates due to increasingly high UK inflation.
However, since then UK inflation has slowed and one of the bank’s most hawkish policymakers, Kristin Forbes, has left the role.
As a result, analysts expect there will be only two votes to hike rates this week. If there are less than this, Sterling is likely to weaken as investors give up on speculation that the BoE will become hawkish in the foreseeable future.
On the other hand, if there are still three policymakers willing to vote for a hike, Sterling will soar and will recover against the Euro for the rest of the week.
Investors will also be paying close attention to any potential shifts in tone from the bank’s meeting minutes or inflation report, which are due to be published alongside the bank’s policy decision.
Euro (EUR) Supported Solid Eurozone Retail Sales
The Euro has been sturdy enough to prevent the Pound from recovering much this week despite indications that the Eurozone’s economy could slow slightly in Q3 2017.
Markit’s final July PMIs for the Eurozone have fallen short of expectations, indicating the Eurozone’s private activity wasn’t as strong in July as forecast.
The Eurozone’s overall composite PMI for July was projected to drop from 56.3 to 55.8 but instead came in at 55.7.
Despite this, analysts are generally confident that the Eurozone’s economy will still see strong performance overall in Q3, even if it’s a bit slower than Q2 was.
June’s Eurozone data continues to impress as the June retail sales report beat expectations in both major prints.
Monthly retail sales improved from 0.4% to 0.5% despite being forecast to slow to 0.1%, while the yearly print jumped to 3.1%, beating the expected 2.6%.
While the Euro could see some further support if Friday’s German factory and construction data impresses, the GBP EUR forecast is more likely to be influenced by UK news towards the end of the week.
The Euro outlook is unlikely to change notably until next week, when June trade balances will come in from France and Germany, and Germany’s final July inflation report will be published.
GBP EUR Interbank Rate
At the time of writing this article, the Pound to Euro exchange rate trended in the region of 1.1188. The Euro to Pound exchange rate traded at around 0.8937.