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GBP/EUR Exchange Rate Stumbles as UK Service Sector See Dramatic Slowdown

February 5, 2018 - Written by John Cameron

The Pound Euro (GBP/EUR) exchange rate has stumbled this morning as the UK’s latest Services PMI came in well below expectations.

Pound (GBP) Weakened by Slowdown in Service Sector

Sterling has been put on the back foot this morning, following the release of the UK’s latest Services PMI.

According to data compiled and published by IHS Markit, activity in the UK’s services sector notably slowed last month, with January’s services index slumping from 54.2 to 53.0.

This was below expectations of a modest rise to 54.3 and was the lowest reading since September 2016.

The disappointing result appeared to be largely driven by Brexit anxiety among consumers, with families tightening their pursue strings due to economic uncertainty.

Duncan Brock, Director of Customer Relationships at the Chartered Institute of Procurement & Supply, said;

‘Brexit blame has emerged once again as the reason for the slowdown in growth of services activity, as consumers reined in spending and displayed anxieties about the future.’

On top of this many firms are also feeling the pressure of rising input costs, with firms warning that they can not continue to shoulder the increased costs and that they will have to pass these rises onto the consumer.

With the UK’s service sector accounting for over 80% of the UK’s economic growth, the reading prompts some concerns that growth will have slowed at the start of 2018.

In fact disappointing services reading also follows on from a downturn in both the manufacturing and construction sectors last month, which analysts warn could lead to a dramatic slowdown in the UK’s first quarter GDP figures.

Chris Williamson, Chief Business Economist at IHS Markit said;

‘The pace of UK economic growth slowed sharply at the start of the year as January saw a triple whammy of weaker PMI surveys.’

‘While the fourth quarter PMI readings were historically consistent with the economy growing at a resilient quarterly rate of 0.4-0.5%, in line with the recent GDP estimate, the January number signals a growth rate of just under 0.3%.’

Euro’s (EUR) Gain’s Trimmed by Decline in Retail Sales

At the same time the Euro’s advance today have been slowed by the release of the Eurozone’s latest retail sales data.

According to data from the European Union’s statistics office Eurostat, sales growth slumped from 2% to -1.1% in December, in line with market expectations.

The fall was mainly attributed to a sharp fall in clothing sales and as they experienced a 3.3% contraction, with a 1.5% decline in fuel also weighing on figures.

The decline in sales at the end of last year was in line a general global trend, as the push for heavy discounts in November as part of Black Friday prompts many consumers to shift their Christmas purchases from December.

GBP/EUR Forecast: BoE to Hint at Possible Rate Hike this Year?

Looking ahead movement in the GBP/EUR exchange rate is likely to be driven by the Bank of England’s (BoE) latest rate decision this week.

The bank will be holding its first policy meeting of the year on Thursday and while it is not expected to make any alterations its monetary policy this month, some investors are hoping that the bank may hint at the possibility of a rate hike sometime this year in the wake of better than expected growth in 2017.

Meanwhile the Euro may strengthen on Tuesday with the publication of Germany’s latest factory order figures, with economists forecasting that order growth will have rebounded from -0.4% to 0.7% in December.

However these gains could be quickly wiped out if Germany’s industrial production tumbled as expected in December.

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