Pound Euro Exchange Rate Slides as Risk-Off Mood Sweeps Markets

Pound Euro Exchange Rate Tumbles to €1.18

(Updated 17:00, 24/1/2022) The Pound Euro exchange rate fell sharply by over 0.5% to a three-week low on Monday, as risk-off trade swept markets.

Escalating concerns that Russia will invade Ukraine fuelled an equity market selloff that increased safe-haven flows.

News that NATO will reinforce eastern Europe and put troops on standby in response to Russia amassing forces near the Ukrainian border soured market mood and sent investors to safe-havens such as the Euro.

Meanwhile, US President Joe Biden is to hold a call with European leaders to discuss the Ukraine situation.

Ahead of the call, the EU urged Russia to de-escalate and warned of ‘massive’ consequences if Russia invades.

The US decision earlier in the day to recall the families of embassy staff in Ukraine fuelled market jitters over the possibility of conflict in the region.

Pound Euro (GBP/EUR) Exchange Rate Pressured by Weak UK PMI Data

The Pound Euro (GBP/EUR) exchange rate is struggling at the start of the week after UK services and manufacturing PMIs came in lower than expected, indicating signs of slower UK economic growth at the start of 2022.

Meanwhile, Eurozone PMI data also disappointed, although strong manufacturing activity in the bloc and an unexpected improvement in German data has provided EUR some support.

Pressure on Sterling has left GBP/EUR trading at 1.1932 at the time of writing, down over 0.1% on the day’s opening level.

Pound (GBP) Weakens on Slowing UK Business Activity

The Pound (GBP) has softened at the start of this week after UK PMI data for January stoked concerns that the impact of the Omicron variant caused UK economic growth to weaken at the start of 2022.

Growth in the service sector slowed for a third consecutive month to an 11-month low as the reading came in lower-than-expected at 53.3, below December’s figure and missing forecast of 54.8.

Following the impact on of the Omicron variant on consumer confidence, hospitality, leisure and travel businesses struggled, while staff absences due to Covid-19 weighed on activity.

At the same time, the manufacturing PMI also fell to 56.9 in January, below forecasts of 57.9.

Chris Williamson, chief business economist at IHS Markit, said:

“Consumer-facing businesses have been hit hard by Omicron and manufactures have reported a further worrying weakening of order book growth, but other business sectors have remained encouragingly robust.

“Looking ahead, while the Omicron wave meant the hospitality sector has sunk into a third steep downturn, these restrictions are now easing, meaning this downturn should be brief. Many business and financial services companies have meanwhile been far less affected by Omicron, and saw business growth accelerate at the start of the year.”

The data also showed inflation remained elevated, likely increasing pressure on the Bank of England (BoE) to raise interest rates at its February policy meeting.

Euro (EUR) Edges Higher on Mixed PMI Data

The Euro (EUR) has come under some pressure this morning after the Eurozone composite PMI for January indicated business activity in the bloc slowed to an 11-month low.

The reading for the service sector PMI came in lower-than-expected at 51.2, down on last month’s 53.1 and nearer the 50 mark that indicates stagnation. Activity in the sector slowed to its lowest rate since April 2021.

However, an unexpected reading of 59 in the manufacturing PMI, above forecast of 57.5 and up on December’s 58, has tempered Euro losses, as factory activity in the Eurozone expanded at its strongest pace in five months.

Chris Williamson, chief business economist at IHS Markit who compile the data, commented:

“Not only has the alleviating supply crunch helped factories boost production, but cost pressures in manufacturing have also moderated.

“Importantly, while the Omicron wave has dented prospects in the service sector, the impact so far looks less severe than prior waves. Meanwhile, perceived prospects have improved among manufacturers, linked to fewer supply shortages adding to the brightening outlook.”

Strong PMI data for Germany has also support EUR sentiment, after the services PMI surprised by rebounding to growth territory, and the manufacturing index hit a five month high.

Pound Euro Forecast: GBP/EUR to Recover Losses?

The Pound Euro exchange rate may continue looking to break above €1.20 in the coming days on BoE rate hike expectations but could face headwinds.

Pressure on Sterling will likely come from ongoing political uncertainty surrounding the UK government, as the report on Downing Street parties nears publication.

Talks on the Northern Ireland Protocol between the lead UK negotiator Liz Truss and EU counterpart Maroš Šefčovič could also drive GBP/EUR volatility.

Reports suggest Šefčovič will suspend negotiations at the end of February if they fail to reach a breakthrough, meaning signs of progress this week could take on greater significance.

Meanwhile, the German Ifo Business climate index may weigh on the Euro tomorrow as forecasts point to morale in the Eurozone’s powerhouse economy remaining at an 11-month low.

However, escalating tensions between Russia and the EU over the threat of an invasion of Ukraine could provide safe-haven demand for EUR exchange rates.

And ahead of the Federal Reserve monetary policy meeting on Wednesday, the European Central Bank’s perceived policy stance compared to other major central banks could continue weighing on the single currency.

Andrew Roberts

Contact Andrew Roberts

Do Not Sell My Personal Information