Pound Euro (GBP/EUR) Exchange Rate Holds near Three-Week High
The Pound Euro (GBP/EUR) exchange rate was muted but held near a three-week high at the start of this week’s session after the UK services PMI for February unexpectedly indicated the strongest rise in business activity since last June.
Meanwhile, the Euro also received support from the Eurozone’s PMIs for February showing better-than-expected growth in private sector activity this month.
Pound (GBP) Steady as UK Service Sector Activity Hits Eight-Month High
The Pound (GBP) was buoyed on Monday morning by PMI data showing a surprise jump in UK business activity in February.
Following the hit of the Omicron variant at the end of 2021, the UK economy rebounded in February.
The UK services PMI surged to an eight-month high of 60.8, well above expectations of 55.5 and up from 54.1 in January.
Recovering consumer spending in the travel, leisure, and entertainment industries helped drive the growth, as easing Covid-19 restrictions boosted service sector activity.
Recent concerns over weaker UK economic growth also eased slightly as accelerating business activity may support a stronger GDP reading in the first quarter.
The data also revealed that inflationary pressure continued to build in February due to rising wages, energy costs, and materials prices.
IHS Markit, who compile the index, said:
“The overall rate of input cost inflation was the steepest since last November and the second-highest since the index began in January 1998. This resulted in another sharp increase in average prices charged by private sector firms, although the latest rise was softer than at the start of the year.”
As the PMIs indicated inflation soared and growth accelerated, expectations rose for the Bank of England (BoE) to raise interest rates at its March policy meeting.
Euro (EUR) Bolstered by Eurozone PMIs
The Euro (EUR) received a boost on Monday morning after the Eurozone’s PMI data for February showed private sector activity expanded at its strongest pace in five months.
Stronger-than-expected growth in the service sector drove the increased activity, as the PMI jumped to 55.8, up from 51.1 in January and well above forecast of 52.
Chief business economist at IHS Markit, Chris Williamson, said:
“The Eurozone economy regained momentum in February as an easing of virus-fighting restrictions led to renewed demand for many consumer services, such as travel, tourism and recreation, and helped alleviate supply bottlenecks.”
However, the data also revealed that average prices for goods and services in the Eurozone rose at a record rate.
Williamson explains:
“Although easing, supply constraints remain widespread and continue to cause rising backlogs of work. As such, demand has again outstripped supply, handing pricing power to producers and service providers.
“At the same time, soaring energy costs and rising wages have added to inflationary pressures, resulting in the largest rise in selling prices yet recorded in a quarter of a century of survey data history.”
Following hawkish comments from European Central Bank (ECB) policymakers recently, further signs of soaring inflation may increase pressure on the Bank to tighten monetary policy sooner than previously suggested.
Pound Euro Forecast: Will GBP/EUR Extend Gains Above €1.20?
The Pound Euro exchange rate looks set to hover around €1.20 in the coming days.
German Ifo business morale data for February will likely provide the Euro support if the data meets expectations.
However, uncertainty over the Ukraine crisis amid the persistent threat of a Russian invasion could continue undermining EUR exchange rates.
Meanwhile, the Pound may benefit from expectations for the BoE to hike rates for a third consecutive occasion at its March policy meeting.
A speech from BoE Deputy Governor Dave Ramsden tomorrow may fuel expectations for more aggressive policy tightening the central bank, particularly as he voted in favour of a 50 basis point rise at the last meeting, more than the 25 basis point rise that happened.
Confederation of British Industry (CBI) manufacturing data released tomorrow may also provide GBP modest support, with a slight rise in its index expected.