January 6, 2021 - Written by Frank Davies
STORY LINK Pound to Euro (GBP/EUR) Exchange Rate Extends Downtrend as UK Services PMI Misses Forecast
Weaker UK Services PMI Dents Pound Euro Exchange Rate
A surprise downward revision to December’s finalised UK services PMI left the Pound to Euro (GBP/EUR) exchange rate on the back foot.
While forecasts had pointed towards a reading of 49.9 the PMI instead clocked in at 49.4, indicating that the sector had experienced greater contraction than anticipated.
With the service sector looking set to see another month of weakness in January, thanks to the fresh national lockdown, confidence in the economic outlook naturally diminished.
On the other hand, support for the Euro remained strong in spite of December’s German inflation data proving underwhelming.
Although the headline inflation rate remained trapped in negative territory at -0.3% this was not enough to prevent the GBP/EUR exchange rate shedding further ground.
EUR Exchange Rates Vulnerable to German Factory Orders Slump
Even so, the mood towards the single currency could sour on Thursday if the Eurozone inflation rate proves similarly discouraging.
With inflation continuing to trail significantly below the European Central Bank’s (ECB) 2% target the case for fresh monetary loosening action appears on the rise.
If markets see reason to bet that the ECB could take fresh action in the months ahead the appeal of the Euro looks set to weaken, offering a potential boost to the GBP/EUR exchange rate.
EUR exchange rates could also come under pressure if November’s German factory orders data proves underwhelming.
Forecasts point towards a -1.2% monthly slump in orders, indicating some weakness within the Eurozone’s powerhouse economy.
Signs that the German economy may not prove as resilient as hoped in the fourth quarter of 2020 could leave the Euro vulnerable to selling pressure, dragging EUR exchange rates lower across the board.
Pound Looks for Support on Positive Construction PMI
The release of the latest UK construction PMI could offer the Pound some limited cause for confidence, meanwhile.
With the sector expected to show another solid month of expansion in December, with the PMI rising from 54.7 to 55, this may limit some of the downside potential of GBP exchange rates.
Although the construction sector only accounts for a limited fraction of the UK gross domestic product the Pound may still benefit from a positive showing here.
Evidence of the manufacturing and construction sectors holding up even in the face of the ongoing Covid-19 crisis could help to limit the risk of a sharp growth contraction.
As the impact of the UK’s return to a state of lockdown also starts to fade this could give the GBP/EUR exchange rate some limited support in the days ahead.
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TAGS: Pound Euro Forecasts