Weaker-than-Forecast UK Construction PMI Limits Pound Euro (GBP/EUR) Exchange Rate Momentum
While the UK construction PMI fell short of forecasts to unexpectedly soften in December the Pound Sterling to Euro (GBP/EUR) exchange rate held onto a modest uptrend.
As the measure remained comfortably within expansion territory at 52.2 the Pound (GBP) was able to quickly shake off any investor disappointment.
Even so, this weaker showing does not encourage particular confidence in the outlook of the UK economy, keeping GBP exchange rates trending in a relatively narrow range.
The underlying details of the report were not overly positive, as Tim Moore, Associate Director at IHS Markit, noted:
‘Construction firms indicated that longer-term business confidence is still relatively subdued, largely reflecting concerns about the domestic economic outlook. Exactly 37% of the survey panel forecast a rise in construction activity over the course of 2018, while around 11% anticipate a reduction. As a result, the balance of UK construction companies expecting growth in the year ahead remains among the weakest recorded by the survey since mid-2013.’
This suggests that the domestic economy remains under some degree of pressure heading into 2018, especially as a significant level of Brexit-based uncertainty remains.
Falling German Unemployment Puts Pressure on GBP/EUR Exchange Rate
Although the Eurozone economy continued to demonstrate solid growth this failed to particularly weigh on the GBP/EUR exchange rate.
A fresh dip in the German unemployment rate was not enough to bolster the appeal of the Euro (EUR) on Wednesday, even as the Eurozone’s powerhouse economy remains in a robust state of health.
While this took the unemployment rate to a record low of 5.5%, bettering forecasts, the impact on EUR exchange rates still proved limited.
Investors still expect the European Central Bank (ECB) to leave its quantitative easing program intact over the months to come, in spite of the bullish nature of recent Eurozone data.
As a result, the upside potential of the Euro appears relatively muted, to the benefit of the GBP/EUR exchange rate.
Slight Improvement to UK Services PMI Forecast to Boost Pound (GBP) Exchange Rates
Reaction to tomorrow’s UK services PMI is likely to be volatile, potentially paving the way for further GBP/EUR exchange rate gains.
Forecasts point towards a slight uptick in sector activity on the month, with the PMI expected to strengthen from 53.8 to 54.
As the service sector is responsible for more than three quarters of UK economic activity a strong showing here could see GBP exchange rates trending sharply higher across the board.
On the other hand, any disappointment could prompt the Pound to reverse much of the week’s gains and return to a more bearish outlook.
Focus will also fall on the latest net consumer credit and mortgage approvals figures, which are likely to provoke speculation over the policy outlook of the Bank of England (BoE).
If the data shows an increasing reliance on credit amongst UK households this could discourage BoE policymakers, reducing the odds of another interest rate hike and denting the GBP/EUR exchange rate.
GBP/EUR Exchange Rate Volatility Forecast on Eurozone Inflation Data
Ahead of the weekend, the GBP/EUR exchange rate could come under some pressure if December’s Eurozone consumer price index impresses.
Markets are hoping to see an uptick in inflationary pressure on the year, something which could give the ECB greater cause for hawkishness.
However, if the core CPI measure fails to pick up as forecast this may send the Euro into a fresh slump.
Even if German retail sales show a strong rebound on the year in November this is unlikely to be enough to outweigh lingering concerns over the strength of domestic inflation.
While the Eurozone economy as a whole still looks set to outperform the UK economy over the coming year the downside bias of the GBP/EUR exchange rate may still be limited in the near term.
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