Pound Euro (GBP/EUR) Exchange Rate Slides as UK Service Sector Unexpectedly Contracts

Surprise UK Services PMI Contraction Drags Down Pound Sterling Euro (GBP/EUR) Exchange Rate

A surprise fall into contraction from November’s UK services PMI saw the Pound Sterling to Euro (GBP/EUR) exchange rate enter a fresh decline.

As forecasts had pointed towards a modest uptick in the index investors were caught off guard by its decline from 50.0 to 48.6, which represents a sharp slowdown on the month.

This abrupt display of weakness does not bode well for the strength of the fourth quarter gross domestic product, given that the service sector remains the primary driving force of the UK economy.

With the UK manufacturing sector also extending its decline markets were left with little reason to favour Pound Sterling (GBP) this morning as the risk of a fourth quarter economic contraction increased.

Commenting on the report, Chris Williamson, chief business economist at IHS Markit, noted:

‘The PMI surveys are not only warning that the underlying trend in the economy is deteriorating markedly, but also that the labour market is cooling.

A worsening jobs market has the potential to feed through to weaker consumer spending and slower wage growth, thereby undermining two of the key supports to the economy in recent months.’

Underwhelming Eurozone PMIs Limit GBP/EUR Exchange Rate Downside

Even so, the mood towards the Euro (EUR) also proved muted in the wake of the Eurozone’s latest raft of manufacturing and services PMIs.

Although the German manufacturing PMI bettered forecasts to strengthen from 42.1 to 43.8, suggesting that the sector’s decline is bottoming out, EUR exchange rates remained on a weaker footing.

As the service sector showed unexpected signs of slowing across the currency union this cast fresh doubt over the resilience of the Eurozone economy.

While the German economy narrowly escaped recession in the third quarter the risk of a fourth quarter contraction lingers, as the service sector struggles to offset the sustained manufacturing decline.

As a result, the single currency struggled to find any particular traction against its rivals ahead of the weekend.

UK Reported Retail Sales Uptick May Offer Pound Rallying Point

The mood towards the Pound could see some improvement on Monday, however, if November’s CBI distributive trades index shows signs of recovery.

An uptick in reported retail sales may encourage bets that consumer spending could help to shield the economy from its weaker manufacturing sector in the final quarter of the year.

Even so, with the index expected to remain in negative territory the potential for a GBP/EUR exchange rate rally could prove limited.

Any signs of a fresh deterioration in consumer sentiment may also put a fresh dampener on the Pound.

Euro Looks for Boost on Improved German Business Sentiment

Support for the Euro, meanwhile, may pick up on the back of the latest set of German IFO business sentiment indexes.

An improvement in the headline business climate index could help to ease market concerns over the underlying health of the Eurozone’s powerhouse economy, in spite of the poor PMIs.

On the other hand, if the business expectations index shows any signs of deterioration EUR exchange rates could shed fresh ground at the start of the new week.

Unless investors see renewed cause for confidence in the economic outlook the GBP/EUR exchange rate is likely to benefit.

Louisa Heath

Contact Louisa Heath