Pound Euro (GBP/EUR) Exchange Rate Weakens as Markets Digest UK PMI

GBP/EUR Exchange Rate Dips despite Fall in EU Sales

The Pound Euro (GBP/EUR) exchange rate has traded in a mixed range so far this morning on an influx of mixed data from the UK and the Eurozone. Presently, the Pound (GBP) is losing support as markets digest this morning’s finalised services PMI, which fell to 52.6 in July 2022 rather than 53.3 as expected.

At the time of writing, GBP/EUR is trading at €1.1948, down slightly from today’s opening levels.

Pound (GBP) Falls on Service-Sector Slowdown

The Pound is weakening against several of its peers today as the UK’s services PMI missed expectations. Service-sector activity remains above the threshold separating contraction from expansion but has retreated to the softest level of growth in 17 months.

Markit economics concludes that inflationary pressures and the cost-of-living squeeze are to blame for heightened economic uncertainty and a subsequent fall in business gains: the agency observes that operating expenses and average prices have continued to rise at elevated rates.

Tim Moore, Economics Director at S&P Global Market Intelligence, comments of the data:

‘UK service providers reported their worst month for business activity expansion since the national lockdown in February 2021.

‘The near-term outlook also looks subdued, as new order growth held close to June’s 16-month low and business optimism was the second weakest since May 2020.’

Also denting Sterling sentiment are forecasts that the UK economy is ‘heading for stagflation’ as high inflation pairs with a looming recession to inflict a winter of economic misery.

Research from the National Institute of Economic and Social Research revealed this morning that one in five households may be left without savings by 2024 on account of the cost-of-living crisis.

Euro (EUR) Wavers on Poor Retail Data

The Euro (EUR) is trading in a mixed range this morning in spite of an unexpected fall in June’s Euro area retail sales. Today’s release printed at -1.2% rather than 0% as forecast.

The data marks the biggest decline so far this year, as high consumer prices, borrowing costs and low confidence weighed upon spending. Sales fell for both food, drinks and tobacco and non-food, with fuel spending declining by 1.1%.

Elsewhere, the Eurozone’s finalised services PMI printed above expectations at 51.2, but still marked a slowdown on last month’s expansion. The reading was widely interpreted, alongside the bloc’s manufacturing PMI, as a sign of foreboding – but Euro losses were capped by a better-than-expected German trade balance.

In Germany, the trade surplus increased in June to €7.7bn from €2.6bn the previous month – rather than fall into deficit as expected. This occurred as imports jumped by 24.9% while exports rose at a slower pace.

Countering tailwinds, the Association of German Chambers of Industry and Commerce (DIHK) cautioned that Germany’s export industry faces a difficult second half of the year:

‘Supply chain disruptions and high costs for energy, raw materials and imported inputs continue to hamper production…

Also, the cooling of the economies of important export partners, such as the United States, China or the euro zone, is also dampening demand for products ‘Made in Germany’.’

GBP/EUR Exchange Rate Forecast: BoE Decision to Direct Movement?

Looking ahead, tomorrow’s interest rate decision from the Bank of England (BoE) is likely to be the main market-moving data. The UK’s central bank is now widely expected to hike interest rates by 50bps, which could boost morale – although the tone of the press conference may have a greater impact on GBP sentiment.

Elsewhere, German factory orders are forecast to have fallen in June, potentially denting the single currency, while construction in the bloc’s largest economy is expected to climb. Mixed data could lend intermittent support to EUR, capping upward momentum for GBP/EUR.

Olivia Evershed

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