A mixed bag of economic reports for the Eurozone and upbeat UK growth data left the Euro to Pound exchange rate trading close to recent lows on Thursday.
Yesterday the Pound achieved its highest level against the Euro since 2012 as investors digested slightly hawkish Bank of England meeting minutes and impressive UK retail sales data.
Sterling largely held these gains overnight and maintained its bullish relationship with the Euro after Markit released its manufacturing/services PMI reports for the Eurozone and its largest economies.
The reports showed that while the service sectors of both Germany and the Eurozone expanded strongly, the manufacturing sectors of the respective regions grew by less-than-forecast in May.
Although economists had expected France (the Eurozone’s second largest economy) to see expansion in both major sectors, the PMI measures defied expectations by contracting.
French manufacturing PMI dropped from 51.2 in April to 49.3 in May while services PMI slid from 50.4 to 49.2.
German manufacturing PMI came in at 52.9 instead of 54.0 while the Eurozone’s manufacturing measure drooped from 53.4 to 52.5.
The Markit composite PMI for the Eurozone came in at 53.9 in May from 54 in April.
These modest declines aside, the 18-nation currency bloc is still in line to record its best quarterly growth for three years.
Markit economist Chris Williamson said of the results; ‘A slight easing in the Euro area’s rate of growth was seen in May but doesn’t change the picture of a region that’s enjoying its best spell of growth for three years, especially when an acceleration in growth of new orders suggests that the pace of expansion could pick up again in June.’
However, Williamson did add; ‘Deflationary pressures remain a major issue, however, and the ongoing fall in average prices charged for goods and services adds to the likelihood of the ECB taking action to boost the economy at its June meeting.’
The Euro also came under pressure as European Union official Jean-Claude Junker asserted that the Eurozone’s low inflation should be a serious cause for concern.
During an interview Junker commented; ‘I don’t think that we are facing a danger of deflation, but the ECB was right to say via the President of the bank that the inflation situation is of serious concern.’
This statement supports the case for the ECB introducing additional stimulus next month and added to the pressure on the Euro.
Meanwhile, UK GDP data confirmed that the UK’s economy expanded by 0.8 per cent in the first quarter of the year.
As the report showed an unexpected decline in UK exports and imports, Euro losses were limited after it was published.
UK news might be thin on the ground tomorrow but considerable EUR/GBP volatility could still occur in response to Germanys growth data and business climate report.
Euro to GBP Update – 23/05/14
The Euro’s bearish relationship with peers like the Pound persisted on Friday as investors avoided the common currency ahead of the likely introduction of additional European Central Bank stimulus.
With the threat of deflation ever present and nations like France not only seriously underperforming but putting the recovery of the Eurozone in doubt, it appears all but certain that the ECB will take action in June.
While the options of introducing a negative deposit rate, an interest rate cut and a new bond-buying scheme have all be discussed, some investors believe that the central bank will implement a combination or, or even all, of these measure in order to shore up the Eurozone’s recovery.
In comparison, a veritable stream of positive UK reports are upping the odds of the Bank of England issuing an interest rate increase before years-end.
The parallel paths being taken by these two major financial institutions are likely to have a considerable impact on the EUR/GBP exchange rate in the weeks ahead.
As it stands the Euro to Pound exchange rate is close to 17-month lows.
The Euro came under pressure on Friday as economic sentiment reports for Germany showed a steeper than expected decline in confidence.
The common currency looks set to end the week trading lower against the Pound, US Dollar and Australian Dollar
If next week’s economic reports for the Eurozone (including Germany’s retail sales and employment figures) add to the case for ECB intervention the Euro to Pound pairing could test fresh highs.
Euro Exchange Rates
[table width=”100%” colwidth=”50|50|50|50|50″ colalign=”left|left|left|left|left”]
Currency, ,Currency,Rate ,
Euro,
,Pound Sterling,0.8093,
Euro,,US Dollar,1.3628,
Euro,,Canadian Dollar,1.4823,
Euro,,Australian Dollar,1.4777,
Euro,,New Zealand Dollar,1.5960,
US Dollar,,Euro ,0.7338,
Pound Sterling,,Euro,1.2353,
Canadian Dollar,,Euro,0.6745,
Australian Dollar,,Euro,0.6764,
New Zealand Dollar,,Euro,0.6279,
[/table]
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