Pound Weakens as UK Services PMI Contracts to Seven-Month Low

GBP/EUR – Pound Muted in Spite of Services PMI Revision

An upward revision to January’s finalised UK services and manufacturing PMIs was not enough to give the Pound any particular boost this week.

Although the services PMI clocked in at 39.5, as opposed to the initial reading of 38.8, this still represents a significant slowdown for the service sector and well below the 50 marker that indicates expansion.

As the service sector remains the primary driving force of the UK economy, any sustained slowdown within the sector could easily keep the country trapped in a state of recession.

However, the PMIs also indicated that confidence in the service sector hit its highest level since May 2014 as vaccine rollouts boost optimism, potentially offering GBP exchange rates support in the weeks ahead if more signs of recovery increase.

GBP/USD – Pound Under Pressure Ahead of BoE Meeting

GBP exchange rates came under additional pressure at the start of the week as the EU-AstraZeneca row caused concern that supply could be interrupted to the UK’s vaccination programme, and new coronavirus variants were found in the UK.

Further volatility looks likely for the Pound on the back of the Bank of England (BoE) policy announcement on Thursday.

While no change in policy looks likely at this stage any signs of increasing dovishness among policymakers could easily see GBP exchange rates extend their slump.

On the other hand, if the BoE expresses a sense of optimism over the outlook of the UK economy as the vaccine rollout continues at a strong pace, the Pound may recover some of its lost ground.

USD/GBP – US Dollar Firms in Risk-Off Trade

The US Dollar benefitted from safe-haven demand as the market mood soured following the fourth quarter US GDP report that revealed growth hit its lowest level since 1946.

Uncertainty in equity markets and over the size of US fiscal stimulus added to USD gains as frenzied retail trade on the stock market caused more cautious trade earlier in the week.

Friday’s non-farm payrolls report could provoke some major movement for the US Dollar as markets look for fresh signs of the health of the domestic labour market.

Although forecasts point towards a modest uptick in employment after December’s sharp contraction, anything short of a major improvement could keep USD exchange rates under pressure.

As long as unemployment looks set to maintain its elevated level for some time to come, the US Dollar may struggle to make any further gains against its rivals.

EUR/USD – Threat of Double-Dip Eurozone Recession Fuels Euro Weakness

As Germany and the wider Eurozone both saw a quarterly contraction in their fourth quarter GDP readings, this weighed heavily on the appeal of the Euro.

With the currency union appearing increasingly on track to experience a double-dip recession, investors saw limited reason to favour the single currency.

However, the Eurozone inflation rate’s return to positive territory ultimately helped to limit the potential for EUR exchange rate losses this week.

If German factory orders are found to have contracted in December as forecast, though, this could put a fresh dampener on the Euro ahead of the weekend.

Louisa Heath

Contact Louisa Heath