Data, Central Bank Expectations Tipped to Keep Sterling Supported Against Euro Near-Term

Above: The Bank of England offers upside risks to the value of the Pound over coming weeks.

A recent strengthening of UK industrial data could mean that GDP growth quickens in the second half of 2017 while the threat of unease at the ECB could keep the euro in check.

The pound to euro exchange rate is tipped to remain supported over coming days as unease at the European Central Bank over the recent appreciation in the value of the Euro conspires with economic data and hawkish statements around UK monetary policy to keep the pair steady.

A report of unease on the ECB’s governing council over the recent strength of the euro, out Thursday, helped deepen a correction in euro based currency pairs that had begun Wednesday with strategists beginning to fret over the potential for Mario Draghi & Co to try jawboning the currency back further from its earlier highs.

“We doubt if anyone was genuinely surprised by this; the pace of the EUR rally since July will surely be a factor for the Governing Council at the ECB meeting next week,” says Viraj Patel, a foreign exchange strategist with ING Group.

That, combined with subdued inflation and surprisingly strong economic data in the UK have helped to push the pound to euro exchange rate back to 1.0885, up from the 1.0740 low seen earlier in the week.

August’s UK manufacturing PMI came in at 56.9, far in excess of the economist consensus for a reading of 55.0, and up sharply from the July reading of 55.1 - marking a three year peak for the index.

“The broad-based strength of August’s Manufacturing PMI survey adds weight to our view that the sector will put a disappointing first half to the year behind it,” says Capital Economics economist Andrew Wishart.

Wishart noted the sentiment driven purchasing manager survey has long pointed to strengthening output from the sector that simply hasn’t been fully borne out by the official Office for National Statistics production data.

“The PMI survey isn’t an outlier, with the CIPS Industrial Trends survey pointing to strong rates of growth too. As such, we expect the official figures to start to reflect the surveys’ optimism ahead,” Wishart wrote in a note following the release.

If Capital Economics forecasts are correct then a rebound in UK manufacturing could help to quicken the pace of GDP growth in the second half, which was seen slowing during the first two quarters of the year.

This all points to the potential for a GBP-positive interest rate rise in the future.

Bank of England rate setter Michael Saunders, who is known as an interest rate 'hawk', said Thursday that his next vote on UK interest rates will be determined by incoming economic data but that, in his view, an interest rate hike of 25 basis points is already warranted.

Currencies tend to rise as their respective central banks head into a cycle of interest rate rises as global investors seek out the promise of improved returns on their investments.

Sterling rose into the mid-year mark of 2017 in anticipation of a potential 0.25% interest rate rise, but expectations were ultimately reversed as ongoing uncertainty related to Brexit and worse-than-forecast economic data releases were printed.

Should data improve over coming months, and more policy-makers at the Bank talk about raising rates, Sterling could enjoy a more substantial recovery.