The announcement that Greece has ended its stalemate with creditors to secure the next tranche of bailout funds gave the Euro cause for confidence.
As the threat of a summer default faded the appeal of the single currency strengthened, in spite of the opposition that the agreed labour reforms and pension cuts are likely to face.
Confidence also remained buoyant thanks to Emmanuel Macron’s continued lead in the French presidential election, with the centrist polling 22 points ahead of far-right rival Marine Le Pen.
With the future of the currency union looking rather more stable at this juncture investors saw little reason to sell out of EUR exchange rates.
A solid raft of Eurozone PMIs added to the bullish mood of the Euro, with Spain in particular continuing to enjoy a robust state of growth in its manufacturing sector.
Even so, following Thursday’s more dovish European Central Bank (ECB) policy meeting the upside potential of the Euro Pound exchange rate remained somewhat limited.
Policymakers are unlikely to take a hawkish view in the near future, as researchers at HSBC noted:
‘The recent inflation rollercoaster seen in the Eurozone due to base effect of energy, colder-than-usual winter and the timing of Easter should be nearing an end. February (2%) should have marked the peak, whilst headline inflation should fall until June.’
Even so, if April’s German labour market data demonstrates continued improvement then the EUR GBP exchange rate could find further support.
Should the Eurozone’s powerhouse economy show signs of weakness, however, the mood towards the single currency could sour.
Demand for the Pound picked up on Tuesday morning, though, as April’s UK manufacturing PMI strongly bettered expectations.
While forecasts had pointed towards a modest slowing to 54 the index instead leapt to 57.3, rising to a three-year high as the sector expanded markedly.
This helped to ease concerns over the outlook of the UK economy, even after the disappointing first quarter gross domestic product report.
Nevertheless, worries over Brexit kept up the downside pressure on Sterling this week as tensions between UK and EU officials mounted further.
Reports that Brussels is discouraged by Theresa May’s insistence on parallel talks over the divorce and a fresh trade deal raised the prospect of an early breakdown in the negotiation process.
If fears of an exit via the cliff edge continue to mount then the EUR GBP exchange rate is likely to extend its recent gains further.
However, if Thursday’s services PMI similarly betters expectations then the Pound could find a stronger rallying point.
Given that roughly 80% of UK economic activity stems from the service sector a bullish showing here could dramatically improve the outlook for GBP exchange rates.
Current EUR GBP Interbank Exchange Rates
At the time of writing, the Euro Pound exchange rate was making modest gains at 0.84. Meanwhile, the Pound Euro exchange rate had returned to a downtrend around 1.18.
