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Pound Sterling to Euro (GBP/EUR), US Dollar (GBP/USD) Exchange Rates Sink after UK Manufacturing Dip – Grexit to Cause Double Digit Inflation?

Pound Sterling Currency Forecast

The Pound Sterling to Euro (GBP/EUR) exchange rate hit a three-week low on Friday after Markit’s UK Manufacturing Purchasing Managers Index (PMI) took a surprising tumble lower; the Pound Sterling to US Dollar (GBP/USD) exchange rate was also trading lower.

The UK economic recovery has been picking up pace in recent months and investors have been forecasting Bank of England (BoE) interest rate hikes in the near future. However, Friday’s decline in the UK manufacturing ecostat disappointed investors and caused the Pound to sink.

Markit stated: ‘April saw a marked slowdown in the rate of expansion of the UK manufacturing sector. Output rose at the weakest pace since November last year, while the base of the upturn narrowed and became further skewed towards the consumer goods sector.’

The UK general election is thought to be having an influence on certain aspects of the economy as businesses and citizens feel concern over the prospect of a major political shakeup.

Markit economist Rob Dobson commented: ‘Coming on the back of weaker-than-expected GDP numbers on Tuesday and only six days before the general election, today’s UK PMI delivered less than positive news on the health of the manufacturing sector.’

‘Rates of expansion in production and order books both slowed sharply in April, meaning manufacturing is again unlikely to provide much of a boost to broader economic growth. This keeps the emphasis on maintaining the recovery highly reliant on the service sector.’

Pound Sterling to Euro (GBP/EUR) Exchange Rate Forecast

Meanwhile, the Euro has made a spectacular recovery against a host of other majors in the past few days, spurred by a weaker US Dollar and some upbeat Eurozone data.

Global market expert Yauhiro Kaizaki commented: ‘Improving Euro area data spurred an unwinding of bets on Euro weakness under the European Central Bank’s aggressive easing.’

The Eurozone managed to climb out of deflation in April with the Consumer Price Index edging up from -0.1% to 0.0%.

However, ongoing Greek negotiations threaten to tip the Euro over at any moment, with an increasing number of investors now forecasting a ‘Grexit’ as a very real possibility.

If a Grexit were to occur, it could have a devastating effect on both the Eurozone and Greek economies, and it’s expected that the Euro (EUR) exchange rate would sink against a host of other major currencies.

Bank of America Merril Lynch economist Ruben Segura-Cayuela commented: ‘In a Grexit scenario, it is important to distinguish between the short and the long run. In the short run, with the country likely outside markets, sharp currency devaluation, a credit crunch, and a (forced) tighter fiscal stance, the Greek economy would suffer a GDP contraction of unprecedented magnitude, even by Greek standards.’

‘Just as an example, Argentina contracted 11% in the year after its default and devaluation. Moreover, inflation could increase to double digits.’

Pound Sterling to US Dollar (GBP/USD) Exchange Rate Forecast

Meanwhile, the US Dollar is awaiting the highly influential ISM Manufacturing stat which is forecast to rise from 51.5 to 52.0 in April.

Analyst Takuya Kawabata commented: ‘The Dollar is waiting for direction from European and US yields. If today’s ISM data beats forecasts, views will strengthen that a slump is temporary and the Dollar will advance on expectations over a Fed rate hike.’

Any speculation that the US Federal Reserve could hike interest rates in the near future could lead the US Dollar to Euro (USD/EUR) and US Dollar to Pound Sterling (USD/GBP) exchange rates to rally.

Additionally, the US Construction Spending and University of Michigan Confidence ecostats will also emerge on Friday and could cause US Dollar (USD) exchange rate movement.

The Pound Sterling to US Dollar (GBP/USD) exchange rate is trading at 1.5288; the Pound Sterling to Euro (GBP/EUR) exchange rate is trending in the region of 1.3598.