Eurozone data and central bank speak helped to keep the Pound on the back foot against the Euro, amidst a pivotal moment in the Brexit negotiations.
The Euro exchange rate rose Friday after the latest round of PMI surveys of the Eurozone manufacturing and services industries topped expectations, pointing toward an acceleration of Eurozone growth in the third quarter.
The survey results helped to keep the Pound-to-Euro rate under pressure both before and after an eagerly anticipated speech by Prime Minister Theresa May in Florence, Italy.
Friday’s IHS Markit Manufacturing PMI reading came in at 58.2, up from 57.4 in the previous month, and above the consensus estimate of economists for a print of 57.2.
The IHS Markit Services PMI also rose sharply for the month, coming in at 55.6, up from 54.7 in August, above the consensus estimate for an unchanged reading of 54.7.
“The Eurozone economy ended the summer with a burst of activity, with the PMI signalling renewed impetus to already-impressive rates of growth of output, order books and employment during September,” says Chris Williamson, chief business economist at IHS Markit. “The survey data point to 0.7% GDP growth for the third quarter, with accelerating momentum boding well for a buoyant end to the year.”
The implications of the data beat for the Eurozone economy, European Central Bank policy and therefore the Euro could not be more clear:
There now appears little excuse for the ECB to avoid pushing ahead with an October announcement that they are to start shutting down their money printing presses.
It is the promise of an end to quantitative easing that has been a major driver of Euro strength in 2017.
The Euro-to-Pound rate edged up 0.37% during early trading, to be quoted at 0.8827, making for a Pound-to-Euro rate of 1.1329. The Euro-to-Dollar rate was quoted 0.41%% higher at 1.1992 immediately after the release.
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Manufacturing led the upturn across the Eurozone, with the industry expanding at its fastest pace since 2011, particularly in France and Germany. Inflows of new orders showed their largest monthly increase since April 2011 while input costs and selling prices both also ticked up a notch - welcome news for the ECB no doubt.
“This encouraging economic backdrop is strengthening the EU governments’ optimism about the future, helping to reinforce their firm stance vis a vis the UK in Brexit negotiations,” says Stear.
The data comes at the same time as ECB chief Mario Draghi begins a speech at Trinity College, Dublin. The Dublin address is seen yielding little of interest to markets on monetary policy as the ECB president already passed up the chance to offer new information in another speech at the European Systemic Risk Board annual conference Thursday.
"In all, the euro-zone PMI suggests that the economy remains very strong and will embolden policymakers at the ECB," says Stephen Brown, a European economist at Capital Economics. "Indeed, the price indices of the Composite PMI also picked up in September."
The European Central Bank is widely expected to announce the fate of its quantitative easing (bond buying) program in October. Many have seen the strong rise of the Euro during the year to date as a possible headwind to any ECB effort to curtail the program.
This is because a rising currency can weigh on inflation while the very purpose of the ECB's stimulus has been to lower market interest rates, spur economic activity and thereby, boost inflation.
"Nevertheless, they [prices indices] continue to point to inflationary pressure rising only gradually. This supports our view that the ECB is unlikely to raise interest rates until 2019," says Brown.
Friday’s Eurozone data and central bank speak comes ahead of a pivotal moment in the Brexit negotiations.
Prime Minister Theresa May will speak in Florence at 14:00 pm and is expected to offer to pay the European Union more than €20 billion, as part of a so called divorce settlement, in order to move negotiations onto the subject of the UK’s future relationship with the EU.
“Concessions from May on the “Exit bill” would probably kick-start stalled negotiations, allowing for progress to be made on the divorce settlement when the fourth round of Brexit negotiations begins on Monday 25th September,” says Finn McLaughlin, a UK economist at Capital Economics.