Pound Euro Exchange Rate Struggles to Find Momentum Following Shock Contraction in UK Service Sector

GBP/EUR Exchange Rate Muted Following UK Service PMI

The Pound to Euro (GBP/EUR) exchange rate is stuck trading in a narrow range this morning as markets digest the UK’s latest services PMI.

At the time of writing the GBP/EUR exchange rate is trading at around €1.273, virtually unchanged from this morning’s opening rate.

Gloomy UK PMIs Take Their Toll on the Pound (GBP)

The Pound (GBP) is struggling to find momentum this morning after the UK’s services index capped off a particularly gloomy round of PMI releases in September.

According to data published by IHS Markit, the UK’s services PMI slumped from 50.6 to 49.5 last month, crossing into contraction territory for the first time since March and missing expectations for a more modest slide to 50.3.

September’s gloomy PMIs cap off what has already been a weak quarter for the UK’s private sector, leading analysts to warn the UK could be facing a recession this year after GDP contracted in the second quarter.

Commenting on the survey Chris Williamson, Chief Business Economist at IHS Markit, said:

‘At current levels the surveys point to GDP falling by 0.1% in the third quarter which, coming on the heels of a decline in the second quarter, would mean the UK is facing a heightened risk of recession.

‘The increasingly dire readings push the surveys further into territory that would normally be associated with policy stimulus from the Bank of England, suggesting a greater likelihood that the next move in interest rates will be a cut.’

Euro (EUR) Steady as Eurozone Retail Sales

At the same time, the Euro (EUR) is trading steadily this morning following the release of the Eurozone’s retail sales figures.

The European statistics agency reported sales expanded by 0.3% in August, rebounded from an upwardly revised 0.5% contraction and printing in line with expectations.

This helped to offset the final release of the Eurozone composite PMI earlier this morning after growth in the blocs private sector was shown to have only narrowly avoided stagnation in September.

GBP/EUR Exchange Rate Forecast: US-EU Trade Dispute to Keep a Lid on the Euro?

Looking ahead, the Pound to Euro (GBP/EUR) exchange rate may struggle to breakout of its current range and the threat of a US-EU trade war and the continued uncertainty surrounding Brexit limit the upside potential in both currencies.

For EUR investors the widening of the US-EU trade dispute could increase jitters surrounding the single currency as it could put even more pressure on the already anaemic Eurozone economy.

The Trump administration is set to impose $7.5bn worth of tariffs on EU exports within weeks after the World Trade Organization (WTO) ruled against the EU in a dispute over state aid given to European aerospace giant Airbus.

At the same time, as we edge ever close to the current Brexit deadline on 31 October, we are likely to see GBP investors grow increasingly skittish as uncertainty over the whole situation continues to grow.

While Parliament has passed a bill compelling Boris Johnson to seek an extension to Brexit if he is unable to reach a deal with the EU, Johnson has repeatedly claimed that he will allow for another delay.

Couple with the looming threat of a snap election, and it’s not surprising to see why markets are likely to remain wary of the Pound in the weeks to come.

Matthew Andrews

Contact Matthew Andrews