GBP EUR FOREX Rates: The Pound to Euro Exchange Rate Falters as UK Services Growth Cools

October 5, 2014 - Written by Toni Johnson

STORY LINK GBP EUR FOREX Rates: The Pound to Euro Exchange Rate Falters as UK Services Growth Cools

The British Pound to Euro exchange rate (GBP EUR) saw steady losses last Friday as growth in the UK services sector slowed in September 2014.

Although economists’ had expected a slight cooling, the actual figure showed a much larger drop than forecast.

The Markit UK Services Purchasing Managers Index (PMI) edged down to 58.7 in September from August’s 60.5.

Furthermore, Composite PMI also crept lower to 57.4 from 59.3. On the other hand, Eurozone Retail Sales figures have been upbeat on Friday which may offer a small pocket of hope to the flailing 18-nation economy.

Retail Sales Bolster Euro Rate Gains Against the Pound Sterling

The Eurozone retail sector saw unexpected growth in August as sales soared by 1.2% - economists had forecast only a 0.1% rise. On the year, Eurozone Retail Sales figures had risen by 1.9%, much more favourable than July’s annual increase of 0.5%. With household demand for goods increasing sales, economists hope for an improvement in economic growth in the third quarter. Economist Howard Archer commented: ‘August’s jump in retail sales fuels hopes that consumer spending could make a decent contribution to Eurozone GDP [Gross Domestic Product] growth in the third quarter. Retail sales volumes were up by 0.6% in the three months to August compared to the three months to May. Barring a very sharp correction in September, retail sales volumes look likely to have grown by around 0.7% quarter-on-quarter in the third quarter.’

Furthermore, the Eurozone also saw German Markit Services and Composite final figures positively revised on Friday. The Services index jumped to 55.7 from the flash reading of 55.4. Composite PMI leapt to 54.1 in August, a rise from July’s 53.7. Any figures above 50 denote expansion, while below signals contraction. Markit economist Oliver Kolodseike commented on the data saying: ‘In contrast to the struggling manufacturing sector, Germany’s service sector continued to power ahead at the end of the third quarter. However, economic growth is expected to be well below the 0.7% expansion seen in the first quarter, as manufacturing stagnated.’

British Pound Softer vs Dollar and Euro after Services Data

The Pound initially softened on Friday after Bank of England policymaker Ben Broadbent stated that the UK economy was ‘not yet ready’ for the central bank to increase interest rates. The Deputy Governor, who holds a place on the Monetary Policy committee (MPC), concurred with the opinion that increases in interest rates will see ‘a certain number of borrowers’ run into problems. However, Broadbent doesn’t believe that it will cause as much difficulty as speculation has suggested. Broadbent stated: ‘I would lean against the view, I think, that any rise in interest rates would cause a calamity for a very large number of households. I think that’s an exaggeration of where we are at the moment.’ Broadbent’s dovish perspective is unlikely to offer Sterling any support in the near future.

Following Broadbent’s remarks, Sterling has been offered no chance to regain stability. UK Markit Services and Composite data fell in September, with the UK service sector showing its weakest growth in three months, indicating that momentum in the UK recovery is slowing. Monday will see German Factory Orders and Construction PMI, German and Eurozone Retail PMI and an Investor Confidence index released, which may alter the Euro exchange rate. The UK will see a quiet day by way of data on Monday with only New Car Registrations figures available. Tuesday, however, is predicted to see more movement for the Pound as the highly influential UK Gross Domestic Product numbers are published.

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