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GBP/EUR Weakens as Manufacturing Data Shows 20-year best for Eurozone

January 2, 2018 - Written by

The Pound Sterling slipped below opening levels versus the Euro today after a worse than expected result from the latest UK manufacturing data.

The GBP/EUR exchange rate has fallen -0.1% to 1.1242, despite analysts receiving the data warmly.

Manufacturing PMI Weakens, Prompting GBP Sell Off

Markets and analysts appear to have differing views on the latest UK manufacturing data, after the manufacturing PMI for December dropped much further than markets had anticipated.

The seasonally adjusted index was expected to fall from 58.2 to 57.9, but instead dipped to 56.3.

Despite the worse than expected slowdown in the rate of sector activity, IHS Markit Director Rob Dobson was upbeat on the data, commenting:

‘UK manufacturing ended 2017 on a positive footing. Although growth of output and new orders moderated during December, rates of expansion remained comfortably above long-term trend rates. The sector has therefore broadly maintained its solid boost to broader economic expansion in the fourth quarter. The outlook is also reasonably bright, with over 50% of companies expecting production to be higher one year from now.’

Duncan Brock, Director of Customer Relationships at the Chartered Institute of Procurement and Supply, also views the latest research favourably, stating:

‘The manufacturing sector’s performance is encouraging, showcasing a resilient response to the ebbs and flow of the year’s uncertainty with a sparkling end to a strong period of growth.’

When taken together with the manufacturing PMIs for October and November, December’s index shows that the industry averaged a score of 57 during the final quarter of 2017; the strongest reading since 2014 Q2.

Nonetheless, markets have continued to sell GBP today, leaving Pound Sterling exchange rates in negative territory.

EUR Higher as Manufacturing PMIs Show Strongest Sector Expansion in 20 Years

Manufacturing PMIs have also been released for the Eurozone this morning and, like those for the UK, have shown that the sector finished 2017 on strong form.

However, the overall findings from the Eurozone’s indices are far more impressive than the UK indices - while UK manufacturing may be doing its best in over three years, the Eurozone’s industry sector starts the New Year having just clocked in its fastest pace of activity growth in over 20 years.

According to Chief Business Economist at IHS Markit Chris Williamson;

‘The Eurozone manufacturing boom gained further momentum in December, rounding off the best year on record and setting the scene for a strong start to 2018. The final PMI was in line with the earlier flash number, confirming a record monthly improvement in business conditions at the end of 2017. Forwardlooking indicators bode well for the New Year: new orders rose at a near-record pace, while purchasing growth hit a new peak as firms readied themselves for higher production.
Meanwhile, job creation was maintained at November’s record pace.’

Although the finalised indices for Italy and France were revised slightly lower on preliminary estimates, the German and overall scores held firm.

This data further adds to the picture that the Eurozone is enjoying a strong economic recovery, moving further away from the turbulence caused by the financial crisis and the sovereign debt crisis.

However, as long as inflation data continues to run significantly below the European Central Bank (ECB) target of 2%, the positive impact of strong economic data upon the Euro may prove slightly muted.

Can GBP Hold Ground against EUR if German Unemployment Data Improves as Forecast?

Tomorrow is likely to be a volatile day for the GBP/EUR exchange rate, given the significance of the data scheduled for release.

The UK’s next PMI due out will be the construction index - on its own it tends not to be very impactful, considering the small contribution the sector makes to the UK economy.

However, because the construction index is released between the manufacturing and services indices, traders often look for a pattern; therefore, if the construction index declines as today’s manufacturing PMI did, the Pound could fall on suspicions that the services index will also have weakened.

Even if the construction PMI prints positively, the Pound could struggle to remain in positive territory tomorrow, given German unemployment figures for December are set for release and are forecast to show a falling rate of joblessness in the Eurozone’s powerhouse economy.
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