- EUR Exchange Rates Mixed – Dovish ECB outlook expected
- GBP Softens – Ahead of Manufacturing PMI
- USD Surges – Hawkish Fed expectations boost US Dollar
- EUR Predicted to Edge Higher – US Dollar strength to limit gains
EUR/GBP Trending Higher Today
The Euro to Pound Sterling exchange rate was left trending in the region of 0.7700 as the European session opened.
The common currency was able to gain on the Pound ahead of the UK’s Manufacturing PMI as the latest EU referendum poll result put the lead camp ahead.
Concerns that the UK’s manufacturing gauge would confirm that the nation remained in contraction territory also limited Sterling demand.
However, the Euro to Pound Sterling exchange rate remained stronger even as the UK’s Manufacturing PMI outstripped forecasts and Germany’s final manufacturing PMI figure was negatively revised.
With economists still concerned that the UK’s manufacturing sector will remain a drag on domestic output, the result wasn’t upbeat enough to provide Sterling with much of a lift.
However, as the services sector accounts for 70% of total UK GDP, the Markit Services gauge (due for publication on Friday) is likely to have more of an impact on GBP trading.
(Previously updated 5:15 31/05/2016)
Euro (EUR) Exchange Rates Edge Higher on Positive German Labour Market
The Euro continues to hold a weak position versus a number of its major peers owing to the unfortunate combination of improved Federal Reserve rate hike bets causing US Dollar appreciation, coupled with increased speculation of European Central Bank (ECB) stimulus expansion.
ECB Governing Council member Ignazio Visco recently stated that the central bank will continue to use all the instruments at its disposal to balance the risk of disinflation.
‘For monetary policy, the main challenge remains the persistence of excessively low inflation,’ stated Visco, who is also Governor of the Bank of Italy. ‘We will continue if necessary to deploy all the instruments made available to us in our mandate.’
However, positive domestic data has been enough to sustain fractional Euro gains against some major peers. May’s German Unemployment Rate unexpectedly dropped from 6.2% to 6.1%, on a seasonally-adjusted basis, with 11,000 fewer unemployed.
‘The labour market continues to develop positively,’ stated Frank-Juergen Weise, President of the labour agency. ‘Employment has grown strongly and demand for labour has increased significantly.’
The estimate for May’s annual Eurozone Consumer Prices met with expectations of a rise from -0.2% to -0.1%, with core consumer prices advancing from 0.7% to 0.8% in the same month.
‘Inflation is way below the objective, so the ECB will keep the door for more easing open,’ said Holger Sandte of Nordea Markets in Copenhagen. ‘It will not be easy for Draghi to choose the right words, he has to keep the easing fantasy alive but he has to say that growth is OK — not in every country, but on average it’s OK.’
Pound Sterling (GBP) Conversion Rate Holds Strong Position on Easing ‘Brexit’ Concerns
Towards the close of last week the British Pound registered significant gains versus its peers, shaking off the unfavourable title of ‘worst performing currency in 2016’.
The appreciation has been mostly the result of easing ‘Brexit’ concerns as traders react to opinion polls that show the UK will likely vote to remain a member of the European Union.
With several highly influential institutions, including the Bank of England (BoE), warning of the risks to the UK’s economy in the event of a ‘Brexit’, investors are hopeful that previously undecided voters will now vote to remain.
However, this does not completely mask the fact that the UK’s outlook is clouded at best, especially amid expectations that weak sectoral output will drag on Gross Domestic Product growth.
One saving grace has been better-than-expected Consumer Confidence, with hopes that improved consumer spending will drive economic growth even as manufacturing and construction output diminishes.
However, consumer confidence remains historically low and ‘Brexit’ jitters continue to cloud the outlook, as GfK’s Joe Staton states;
‘Our confidence in economic matters, whether we look back or ahead 12 months, remains way below last year. Is it because the Brexit gremlins are hard at work? Almost certainly yes.’
With an absence of domestic data to drive changes today, the UK Pound will likely continue to hold its current position of strength. However, there is potential for changes in response to political developments.
US Dollar (USD) Rallies ahead of Consumer Confidence Data
Towards the close of last week the US Dollar strengthened considerably after Federal Reserve Chairwoman Janet Yellen stated that it is now more ‘appropriate’ to hike the official cash rate.
‘What Yellen said confirmed the Fed is open for a June rate increase, and it’s now data dependent,’ said Stockholm based strategist at SEB A/B, Carl Hammer. ‘The Fed might be on hold next month due to Britain’s European Union referendum, but then make it explicit there will be an increase in July. Our view is that there’s more room to add to positive Dollar bets.’
Data dependency is likely to see significant price swings in US Dollar exchange rates, especially given the high number of influential domestic ecostats due for publication this week.
Core Personal Consumption Expenditure, Consumer Confidence, ISM Manufacturing, Unemployment Rate, Change in Non-Farm Payrolls and ISM Non-Manufacturing Composite reports will all be closely watched by traders.
Today’s Consumer Confidence will likely drive Dollar volatility during the North-American session. May’s consumer confidence is forecast to advance from 94.2 to 96.3, an improvement that will pile additional pressure on to the Federal Open Market Committee (FOMC) to revise its current wait-and-see approach to fiscal policy.
While the Fed isn’t likely to adjust interest rates ahead of the UK EU referendum, a revision may be made in July.
If the Fed does hike rates at that point, we can expect the US Dollar to surge, a movement which may inspire broad-based Euro weakness.
However, failure to make any alteration to borrowing costs until later in the year could see the ‘Greenback’ soften.
The Euro to Pound Sterling (EUR/GBP) exchange rate was trending within the range of 0.7571 to 0.7643 during Tuesday’s European session.
The Euro to US Dollar (EUR/USD) exchange rate was trending within the range of 1.1120 to 1.1171.