- Pound Sterling Euro Briefly Slides to 1.1151 – Euro Pound Sterling Hits 0.8967
- UK Markit Construction PMI Disappoints – Pound Falters in Response
- Eurozone Economic Growth Outpaces UK – Euro Becomes More Attractive Option
- BoE Rate Decision on Horizon – Weak Economic Outlook and Wage Growth Means Volatility Likely
The Pound to Euro (GBP EUR) exchange rate briefly faltered this morning after a disappointing UK Markit Construction PMI amplified anxieties that the Bank of England (BoE) might be driven towards taking a dovish stance tomorrow.
The IHS Markit/CIPS UK Construction PMI dropped from 54.8 in June to 51.9 in July, coming up short of the 54.5 expected. This was, in essence, the weakest rate of expansion that the construction sector has seen since August 2016, with commercial building rates contracting and the pace of expansion for housing activity also slowing. Beyond this, new business volumes also declined, and employment growth within construction dropped to its slowest rate in eleven months.
Whilst yesterday’s upbeat UK manufacturing PMI pushed the Pound higher, today’s disappointing UK construction PMI caused the Pound to trim some of its recent gains, particularly with this week’s most significant release; the BoE rate decision (dubbed ‘Super Thursday’ due to the additional publication of the BoE inflation report) coming tomorrow.
Euro (EUR) Sturdy as Eurozone GDP Growth Accelerates Twice as Fast as UK’s
Yesterday saw the release of the Eurozone’s GDP figures, with a 0.6% growth rate revealed for the second quarter of 2017. This came as quite a contrast to the UK’s 0.3% GDP growth and demonstrated that the Eurozone is continuing to recover from its debt crisis.
Whilst this news is indeed positive for the Eurozone economy, anxieties regarding the state of certain economies within the Eurozone remain; particularly in respect to the likes of Greece, which continues to rely on financial bailouts, Italy, which remains plagued by a banking system teetering on the edge of collapse and Spain, which continues to suffer from severe unemployment levels. Additionally, the Eurozone’s inflation level remains well below the European Central Bank’s (ECB) target range.
Despite this, the Euro is currently proving to be the less volatile currency within this pairing – particularly with tomorrow’s BoE rate decision looming.
What Can We Expect for GBP EUR after Tomorrow’s BoE Rate Decision?
The Bank of England is currently forecast to keep interest rates on hold at 0.25%, however, there may be room for Sterling to climb should the number of committee members that call for a rate hike come in larger than two.
At the last meeting in June three members of the committee voted in favour of a rate increase, an event that drove demand for the Pound.
Now, however, with UK inflation falling in June and wage growth remaining weak, expectations are that members of the MPC will become increasingly dovish.
Analysts at Deutsche Bank stated (on the likelihood that the BoE will raise rates):
‘We are sceptical, however, based on a more pessimistic view of the outlook for growth and wages, as well as the risk that Brexit continues to pose to the policy outlook. Our baseline view is unchanged – we do not expect the BOE to tighten monetary policy until Brexit related uncertainties have been sufficiently reduced.’
This is, in essence, the crux of the problem for the Pound at the moment; that Brexit related uncertainty, weak wage growth, and dropping inflation levels will all prevent the BoE from taking decisive action. Should this be the case then tomorrow could see the Pound drop against the Euro.
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