In spite of a weaker-than-expected UK Manufacturing PMI report the Pound failed to come under particular pressure at the start of the week.
While the domestic economy continues to show signs of slowing the debate amongst Bank of England (BoE) policymakers is escalating.
August’s policy meeting is likely to demonstrate the increased divide amongst the Monetary Policy Committee (MPC), with markets still speculating that interest rates could rise sooner rather than later.
However, as the majority of recent policymaker comments have pointed towards continued caution on the matter of interest rates the Pound could struggle to make any particular upside gains in the near term.
If June’s services PMI also falls short of forecast this could return the Pound Euro exchange rate to a downtrend, given that the service sector remains the primary engine of the UK economy.
A soft showing here could give the BoE greater cause for caution, reducing the odds of an imminent rate hike even as inflationary pressure builds.
The latest NIESR gross domestic product estimate may also provoke volatility for the GBP EUR exchange rate in the coming days, particularly if it indicates a further loss of momentum.
Worries over the outlook of the domestic economy and mounting pressures on consumers are likely to limit the appeal of Sterling for some time to come, even if sentiment improves in the short term.
Could Dovish ECB Minutes Extend Bearish Euro Trend?
Confidence in the Euro, meanwhile, remained muted thanks to a mixed raft of Eurozone manufacturing PMIs.
Speculation over the likelihood of the European Central Bank (ECB) returning to a tightening bias in the near future died down somewhat, especially as policymakers remain rather cautious on the outlook.
Even so, as Kit Juckes, research analyst at Societe Generale, noted:
‘With the market unconvinced about a much higher terminal Fed Funds rate in the US, there is a risk of a sharp EUR/USD spike should market expectations about ECB tightening rise much further. This would tighten financial conditions in the euro area prematurely. It is a problem shared by other central banks contemplating policy shifts.’
The GBP EUR exchange rate could come under pressure with the release of the ECB’s latest meeting minutes on Thursday, particularly if there are signs of a greater discussion of any tapering of the quantitative easing program.
If the minutes point towards a prevailing sense of dovishness, though, this could weigh heavily on the appeal of the Euro.
Unless Eurozone data continues to print strongly the GBP EUR exchange rate is likely to benefit as markets reassess their expectations, although any strength should remain fragile.
Comments are closed.