Despite this week’s UK PMIs all beating expectations and indicating to markets that Britain’s economy hasn’t started slowing just yet, the Pound Euro exchange rate has been unable to recover to the week’s opening levels.
While GBP EUR has trended in the region of 1.18 for most of the week, it remains close to lows of 1.17 and over half a cent below the week’s opening levels.
This week has seen a hat-trick of better-than-expected UK PMIs from April, collected and published by Markit.
Tuesday’s manufacturing data beat forecasts of 54 by printing 57.3 and Wednesday’s construction PMI came in at 53.1, beating the predicted result of 52.
Finally and most vitally, Britain’s key services sector PMI unexpectedly improved from 55 to 55.8 when it was published on Thursday. It was predicted to slow to 54.5. This was Britain’s best services sector result in four months.
Markit’s overall composite PMI for Britain improved from 54.9 to 56.2, beating the expected slip to 54.5. IHS Markit chief economist Chris Williamson stated the new data indicates that Britain is on track to grow at a solid pace of around 0.6% at the start of Q2.
So why has the Pound not seen a stronger response to the week’s strong UK PMIs? This is largely due to the strength of the Euro, as investors await the second round of the French Presidential election.
Markets have been jittery this week amid the persistent possibility that anti-EU Marine Le Pen could still win the French Presidential election and begin a ‘Frexit’, removing one of the Eurozone’s biggest economies.
However, her pro-EU opponent Emmanuel Macron has maintained a strong lead in opinion polls.
Investors are even more confident he will win after the final French Presidential TV debate took place on Wednesday night. After over an hour of clashes between the two passionate frontrunners, around 63% of viewers considered Macron to be the ‘most convincing’.
As market bets increase that Macron will be able to maintain his lead of around 60% compared with Le Pen’s 40%, demand for the Euro improved on Thursday and investors are becoming more optimistic about the currency bloc’s 2017 outlook too.
Eurozone ecostats have been strong in recent months and it has been political concerns holding down the shared currency.
However, if Macron wins the final round of the French Presidential election on Sunday, Eurozone political jitters will largely dissipate and investor confidence in the bloc is likely to soar.
This week’s Eurozone data has shown that Q1 growth was better than it had been in the UK or US, while private sectors continue to see strong performance in April according to Markit’s PMIs.
So while Britain’s latest hat-trick of solid PMIs likely has improved the Pound outlook overall, the Euro’s strength has prevented Sterling from gaining.
GBP EUR losses are likely to be limited if UK economic data continues impressing in coming months, but overall the upside potential for the Euro appears stronger in the scenario that Macron wins the French election.
If he loses however, the Pound Euro exchange rate is likely to see massive gains in the short to long-term as ‘Frexit’ bets soar.
At the time of writing, the Pound Euro exchange rate trended in the region of 1.18. The Euro to Pound exchange rate traded at around 0.84.
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