Pound Sterling to Euro (GBP/EUR) Exchange Rate Holding at 2-Year High, Mixed Trading Forecast before ECB Statement

The Pound (GBP) was holding at a two-year high against the Euro (EUR) on Wednesday after both currencies were negatively affected by the publication of weaker than forecast Manufacturing output data.

Earlier in the session, the Euro fell sharply after data showed that manufacturing activity in Germany, the Eurozone’s largest economy, contracted for the first time in 14-months in September, as weakness in the wider Eurozone combined with continuing concerns over the Ukraine crisis and the regions relationship with Russia.

According to the final seasonally adjusted manufacturing Purchasing Managers Index, production in Germany contracted below the neutral 50 number to 49.9. In the previous month, the figure was at 51.4. Economists had been forecasting for a figure of 50.3.

‘September’s manufacturing PMI results paint a worrying picture of the health of Germany’s goods producing sector. Moreover, deflationary pressures persisted into September, with both input and output prices falling since the previous month. This was the first time since March that both price indices registered below the 50 mark,’ said Oliver Kolodseike, an economist at Markit.

The slowdown in Germany will put more pressure onto the European Central Bank to introduce new measures to try to stimulate growth in the region and stave off the growing threat that deflation could take root in the regions heart.

Further gains for the Pound were restrained however after Manufacturing PMI data for the UK also disappointed the markets. The index, which measures how hundreds of UK firms performed in September, fell from August’s figure of 52.2 to 51.6 in September. The growth figure, was the weakest seen since April last year and caused investors to speculate that Bank of England policy makers could refrain from raising interest rates earlier than expected.

The slowing growth figure was blamed on the ongoing weakness in the Eurozone. Continuing strong demand from the rest of the world however kept the figure in expansion territory adding to the argument that the UK economy may be better off looking to the wider world rather than being a member of the EU.

‘The continued weakness in Eurozone countries and the Euro-Sterling exchange rate appeared to particularly undermine growth in September, and resulted in near stagnation in new manufacturing orders,’ said David Noble, CEO of the Chartered Institute of Purchasing and Supply.

Eurozone Data Also Disappoints

The Euro came under more pressure after manufacturing data for the wider Eurozone also came in below expectations. New orders across the currency bloc contracted for the first time in over a year as the region’s economy continues to struggle.

Markit’s final September manufacturing PMI came in at 50.3, the lowest since July last year and below both Augusts’ 50.7 and an earlier flash estimate of 50.5. It held above the 50 level which separates growth from contraction for a 15th month in a row.

Pound Sterling to Euro Exchange Rate Forecast

Sterling is likely to remain supported against the Euro due to the sheer number of negative factors that are weighing upon the single currency.

With unemployment remaining uncomfortably high, production falling and declining sentiment investors will be watching Thursdays ECB policy meeting closely for any signs that policy makers will take further steps to try and stimulate growth in the region.

UPDATE

With the European Central Bank’s interest rate decision looming, the Pound to Euro exchange rate was trending around the 1.2810 level.

The Pound derived some support from a surprising increase in the UK’s Construction PMI and the Euro remained under pressure as investors speculated on the likelihood of the European Central Bank hinting at the introduction of quantitative easing at today’s interest rate announcement.

The Eurozone’s Producer Price Index will also be of interest today. Producer prices are expected to have fallen by -0.1% on the month in August and be down -1.2% on the year.

Euro Exchange Rates