Weak German Construction Growth Weighs Down Euro Pound Sterling (EUR/GBP) Exchange Rate
An unexpectedly sharp decline in the German construction PMI left the Euro to Pound Sterling (EUR/GBP) exchange rate on the back foot this morning.
As the headline PMI dropped from 53.3 to 50.7, falling close to a state of contraction, this raised concerns over the outlook of the Eurozone’s powerhouse economy.
While the deterioration was attributed to adverse weather conditions in January the mood towards the Euro (EUR) still soured in the wake of the data.
Another monthly decline in German factory orders, which fell -1.6% in December, also dented EUR exchange rates.
With signs of a slowdown emerging across the Eurozone the appeal of the single currency proved limited, extending the EUR/GBP exchange rate’s downtrend.
The rising odds of a German recession are likely to weigh heavily on the Euro in the near future.
Pound Sterling (GBP) Recovers Ground Ahead of BoE Rate Announcement
As the impact of Tuesday’s underwhelming UK services PMI faded Pound Sterling (GBP) recovered some of its losses.
While worries over the outlook of the UK economy remain investors saw less incentive to sell out of the Pound in the absence of any fresh domestic data.
However, GBP exchange rates look set to come under renewed pressure on the back of Thursday’s Bank of England (BoE) policy announcement.
While interest rates look set to remain on hold once again the nature of the accompanying meeting minutes could dent the Pound.
Signs that the BoE is unlikely to return to a monetary tightening bias in the months ahead may give the EUR/GBP exchange rate a solid rallying point.
Any downward revision to the Bank’s forecasts in the latest quarterly Inflation Report could also weigh on the Pound as Brexit-based uncertainty continue to cloud the domestic outlook.
Even so, as analysts at TD Securities noted:
‘The MPC remains in the background as Brexit enters an intense period, and forecast changes are unlikely to be material.’
Euro (EUR) Looks Vulnerable Ahead of ECB Economic Bulletin
EUR exchange rates could see further weakness, meanwhile, once the European Central Bank (ECB) publishes its Economic Bulletin.
Confirmation that the ECB favours leaving interest rates on hold for the foreseeable future would limit the appeal of the single currency.
German industrial production figures may equally drag on the EUR/GBP exchange rate on Thursday, with forecasts pointing towards another annual contraction.
Further signs of weakness within the German manufacturing sector would give the ECB greater incentive to adopt a cautious outlook as the odds of a German recession mount.
Unless industrial production surprises significantly to the upside the Euro is unlikely to find a rallying point in the near term, given the weakness seen in other recent economic indicators.