Pound Sterling to Euro (GBP/EUR) Exchange Rate Falls as UK Services PMI Slumps

Near-Stagnation in UK Service Sector Weighs on Pound Sterling Euro (GBP/EUR) Exchange Rate

UPDATE: The mood towards Pound Sterling (GBP) soured markedly on the back of January’s UK services PMI, which unexpectedly declined to just 50.1.

With the service sector slowing to a state of near-stagnation at the start of the year confidence in the economic outlook naturally diminished.

However, as Italian and French services PMIs also showed signs of weakness the softer Euro helped to limit the losses of the GBP/EUR exchange rate for the time being.

Four-Year Low in Eurozone Investor Confidence Boosts Pound Sterling Euro (GBP/EUR) Exchange Rate

UPDATE: As the Eurozone Sentix investor confidence index unexpectedly fell to a four-year low this encouraged the Pound Sterling to Euro (GBP/EUR) exchange rate to recover some of its lost ground.

Investors were spooked as the index dropped from -1.5 to -3.7 in February, indicating that sentiment across the currency union is continuing to deteriorate in the face of political tensions.

This weaker showing adds weight to concerns that the Eurozone economy will continue to slow in the months ahead, denting demand for the Euro (EUR).

Pound Sterling Euro (GBP/EUR) Exchange Rate Falters as UK Construction Slows

As January’s UK construction PMI eased further than forecast this left the Pound Sterling to Euro (GBP/EUR) exchange rate on a weaker footing.

In another disappointing development for the UK economy the headline index dipped from 52.8 to 50.6, missing forecasts and falling perilously close to a state of contraction.

Job creation proved particularly disappointing, unexpectedly declining to its lowest level since July 2016 as firms showed increasing caution ahead of the March Brexit deadline.

As progress towards an agreeable Brexit deal remains lacking this left Pound Sterling (GBP) exposed to fresh downside pressure at the start of the week.

Eurozone Producer Price Index Contraction Dents Euro (EUR) Exchange Rates

However, the weakness of the GBP/EUR exchange rate was limited thanks to the underwhelming nature of December’s Eurozone producer price index data.

As prices contracted -0.8% on the month this suggests that inflationary pressure within the Eurozone economy remains muted.

Following on from weaker German and Eurozone consumer price index figures this is likely to give the European Central Bank (ECB) additional incentive to leave monetary policy on hold for longer.

With ECB policymakers already exhibiting caution over the outlook of the Eurozone economy any fresh signs of weakness further diminish the odds of a 2019 interest rate hike, weighing down the Euro (EUR).

GBP/EUR Exchange Rate Vulnerable to Signs of Slowdown in UK Services Sector

If the UK services PMI follows in the footsteps of the weaker manufacturing and construction figures this could see Pound Sterling come under significant pressure.

As the services sector is responsible for more than three quarters of the UK gross domestic product any signs of a slowdown here would have a major impact on economic growth.

Confirmation that the UK economy lost momentum across the board at the start of 2019 could prompt the GBP/EUR exchange rate to shed further ground.

However, signs of greater resilience within the sector may offer the Pound a rallying point on Tuesday, even as worries over Brexit mount.

Underwhelming Eurozone Services PMIs Forecast to Limit Euro (EUR) Upside

The finalised raft of Eurozone services PMIs look set to weigh on the Euro, meanwhile, as the Eurozone continues to show signs of a slowdown.

Weak performances from Italy and France could drag on the performance of the overall currency union, giving investors fresh incentive to sell out of the Euro.

An underwhelming German services PMI could also weigh heavily on EUR exchange rates, with confidence in the underlying health of the Eurozone’s powerhouse economy already limited.

December’s Eurozone retail sales figures may put additional pressure on the Euro, as forecasts point towards a sharp -1.6% contraction on the month.

If sales failed to pick up during the crucial Christmas period, offering fresh evidence of weaker consumer confidence, this could offer the GBP/EUR exchange rate a boost.

Hannah Wilson

Contact Hannah Wilson