Pound Euro Exchange Rate Fails to Capitalise on Improved UK Services PMI

Pound Euro Exchange Rate Trends Lower in Spite of UK Services PMI Improvement

A better-than-expected UK services PMI reading was not enough to keep the Pound to Euro (GBP/EUR) exchange rate from shedding ground ahead of the weekend.

While the index picked up sharply on the month, strengthening from 39.5 to 49.7, this still indicated that the sector had remained in a state of contraction in February.

With markets still wary of the possibility of the UK economy experiencing a negative growth rate in the first quarter of 2021 the mood towards Pound Sterling (GBP) proved muted.

Although the economy appears to have recovered some of its lost ground since the start of the year and Covid-19 vaccine optimism remained heightened this failed to prevent GBP/EUR exchange rate losses.

Resilient Eurozone Manufacturing PMI Lifts EUR Exchange Rates

The Euro (EUR) found fresh support, meanwhile, thanks to a sharp monthly increase in the Eurozone manufacturing PMI.

As the index jumped from 54.8 to 57.7 in February this pointed towards the manufacturing sector continuing to shake off the impact of ongoing pandemic pressures.

Even though the Eurozone service sector remained trapped in a state of contraction this failed to put any particular dampener on EUR exchange rates at this stage.

With the manufacturing sector’s strength likely to offset much of the weakness within the service sector worries over the economic outlook proved limited today.

Uptick in German Business Confidence to Boost Euro Appeal

Support for the single currency could pick up further on Monday with the release of the latest German IFO business climate index.

Forecasts point towards a modest uptick in business sentiment this month, something which could encourage bets on the prospect of an imminent German economic recovery.

As long as markets see reason to speculate that the Eurozone’s powerhouse economy is on course to return to a stronger footing over the course of the first quarter the mood towards the Euro looks set to improve.

On the other hand, if sentiment fails to pick up as anticipated this may leave EUR exchange rates on a generally weaker footing next week.

Rising UK Unemployment Rate Set to Weigh on Pound Demand

The release of December’s UK labour market data could provoke fresh volatility for the Pound to Euro exchange rate, meanwhile.

With the headline unemployment rate expected to rise from 5% to 5.1% worries over the health of the UK economy could pick up once again.

Evidence that the labour market came under renewed pressure at the end of 2020, even with lockdown conditions eased for the month, may weigh heavily on demand for the Pound.

Another sharp decline in the CBI distributive trades index could also help to drag the Pound to Euro exchange rate lower on Tuesday.

Louisa Heath

Contact Louisa Heath