Pound Euro (GBP/EUR) Exchange Rate Bounces Back as UK Service Sector Avoids Contraction

Upward Revision of UK Services PMI Encourages Pound Euro (GBP/EUR) Exchange Rate Gains

As December’s finalised UK services PMI bettered forecasts, showed an upward revision from 49.3 to 50.0, this encouraged the Pound Sterling to Euro (GBP/EUR) exchange rate to rebound.

With the sector only experiencing stagnation in the final month of 2019, as opposed to a fresh contraction, investors were encouraged to buy back into Pound Sterling (GBP).

Signs of increased business optimism in the survey also helped to buoy market appetite for the Pound, in spite of the signs still pointing towards an underwhelming fourth quarter growth rate.

Commenting on the report, Tim Moore, Economics Associate Director at IHS Markit, noted:

‘With manufacturing and construction output also subdued in December, the latest PMI surveys collectively signal an overall stagnation of the UK economy at the end of 2019.

‘However, the latest UK service sector figures are an improvement on those seen in November and strike a slightly more positive tone than the earlier ‘flash’ PMI for December.’

Euro Fails to Capitalise on Improved Service Sector Performance

While the raft of Eurozone services PMIs also saw positive revisions, demonstrating greater growth in December, support for the Euro (EUR) proved somewhat muted.

The resilience of the service sector was not enough to offset existing worries over the health of the manufacturing sector, which remained in a state of slowdown at the end of 2019.

As a result, markets still saw reason to brace against the possibility of a German economic contraction, in spite of the solid services PMI.

Even though the latest Eurozone producer price index data bettered forecast this also failed to drag on the GBP/EUR exchange rate at the start of the week.

Rising Eurozone Inflation Forecast to Offer EUR Exchange Rate Boost

However, the single currency could find a solid rallying point on the back of December’s Eurozone consumer price index report.

If the headline inflation rate picks up from 1.0% to 1.3% on the year as forecast this could give the European Central Bank (ECB) greater cause for confidence.

Although this would still fall short of the ECB’s 2% inflation target evidence that price pressures are moving in the right direction may encourage EUR exchange rates to push higher across the board.

On the other hand, evidence that inflationary pressure within the currency union remains lacklustre could leave investors with little reason to buy into the Euro tomorrow.

Return of MPs Leaves GBP/EUR Exchange Rate Vulnerable to Political Jitters

As MPs return to parliament from their Christmas break a sense of political anxiety could see the GBP/EUR exchange rate come under renewed pressure.

With time ticking for the UK and EU to agree a fresh trade deal before the end of the shortened transition period support for the Pound could prove muted.

Unless markets see reason to bet that the two sides will proceed with negotiations at a decent pace the upside potential of GBP exchange rates looks set to remain limited.

However, the prospect of an end to the long-running Brexit uncertainty may still encourage the Pound to make some modest gains against its rivals in the near term.

Louisa Heath

Contact Louisa Heath