The GBP EUR exchange rate was higher this week after stronger than expected PMI revisions for the UK economy. The European Central Bank also telegraphed a 25bps interest rate hike in July, which was not as aggressive as some had hoped. The European economy saw its PMIs revised lower and the OECD downgraded the world economy. Boris Johnson also survived a confidence vote and that ends some political distraction.
The GBP v EUR was heading for the weekend trading trying to hold the 1.1700 level as support.
European Central Bank signals a July rate hike
The European Central Bank finally put an end to its loose monetary policy with an announcement that it will raise interest rates in July.
The bank will also end its huge bond buying efforts after this month and opened the door for another hike of rates in September. The central bank was obviously looking to cool recent criticism that it is ignoring soaring inflation.
“The ECB officially ends its long era of unconventional monetary policy,” said ING bank economist Carsten Brzeski.
“Today’s decision shows it’s managed to find a compromise between the doves and the hawks. A 50 basis point rate hike in July seemed to be fended off by opening the door for 50 basis points in September.”
The bank also cut its growth forecasts for the eurozone to 2.8% in 2022 and 2.1% in 2023, from 3.7 and 2.8% previously.
PMI business surveys for the eurozone were slightly lower for the eurozone this week.
“Strong demand for services helped sustain a robust pace of economic growth in May, suggesting the euro zone is expanding an underlying rate equivalent to GDP growth of just over 0.5%,” said Chris Williamson of S&P Global.
“However, risks appear to be skewed to the downside for the coming months. The manufacturing sector remains worryingly constrained by supply shortages and businesses and households alike remain beset by soaring costs.”
UK PMI figures boost the pound sterling
Business activity in the UK was not as bad as initially feared in May, according to the S&P Global survey.
The UK services sector activity expanded more than expected in May, the final report from IHS Markit confirmed this Tuesday.
The S&P Global/CIPS UK Services Purchasing Managers’ Index was revised sharply higher to 53.4 in May versus 51.8 expected.
“May data illustrate a worrying combination of slower growth and higher prices across the UK service sector. The latest round of input cost inflation was the steepest since this index began in July 1996, while the monthly loss of momentum for business activity expansion was a survey record outside of lockdown periods,” said Moore.
However, construction suffered with the number of houses being built dropping to lows seen in May 2020. Builders are concerned that rising interest rates and consumer pressure will dampen demand.
“Residential construction activity was close to stagnation in May, which represented its worst performance for two years amid signs of softer demand and a headwind from low consumer confidence,” S&P Global, said.
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