Pound-to-Euro Rate Retreats After UK Services Sector Slump

Modified: Monday, 25 May 2026 07:36 BST - Written by Admin

STORY LINK Pound-to-Euro Rate Retreats After UK Services Sector Slump

The Pound to Euro exchange rate (GBP/EUR) retreated from 10-day highs above 1.1570 after a sharp deterioration in UK services-sector activity raised fresh concerns over the domestic economic outlook.

While Sterling initially benefited from easing pressure in UK bond markets, disappointing PMI data reinforced fears that growth is slowing sharply even as inflationary pressures remain elevated, creating a difficult backdrop for the Bank of England.

GBP/EUR Forecasts: Retreats from 10-Day Highs

The Pound to Euro (GBP/EUR) exchange rate hit 10-day highs just above 1.1570 in early Europe on Thursday before a retreat to below 1.1560 after weaker than expected UK services-sector data.

The UK 10-year yield dipped below the 5.00% level which will ease immediate fears over a meltdown in the bond markets. Political developments will continue to be monitored closely.

The impact of weak UK data was limited by the fact that the Euro-Zone services sector recorded a sharper rate of contraction in May.

Rabobank expects choppy short-term trading and has a 6-month forecast of 1.1360.

The UK PMI manufacturing index was unchanged at 53.7 for May compared with consensus forecasts of a decline to 52.9.

The services-sector index, however, dipped sharply to a 64-month low of 47.9 from 52.7 previously and well below expectations of 51.7.

The composite output index dipped into contraction territory for the first time in over 12 months even though the manufacturing index was still underpinned by stock building.

Business confidence deteriorated further while there was strong upward pressure on costs and the rate of increase in output charges was close to 39-month highs.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence commented; “The UK economy is facing a perfect storm, as rising political uncertainty adds to the growing impact from the war in the Middle East. Businesses are reporting falling output, surging inflation, supply shortages and job cuts in May.

He added; "The May PMI data indicate that the economy contracted at a 0.2% quarterly rate, representing a marked contrast to the robust growth seen earlier in the year.”

Williamson expects pressures will continue; "Things could well get worse in the coming months, as we have been seeing some support to manufacturing from precautionary stock building which will inevitably fade once warehouses are full.”

The Bank of England will inevitably face a tough set of decisions with the combination of weaker activity and persistent cost pressures.

A dip in expectations surrounding interest rates could hurt the Pound, but this would potentially be offset by reduced fears over damage to the economy.

ECB policies will also be a key element for the Pound. According to central bank sources, there is a strong commitment to increasing interest rates at the June meeting, but it suggested that rates are more likely to be held in July.

ING commented; “The intention is reportedly to cool expectations for back-to-back hikes, even as the inflation outlook shifts towards the adverse scenario. This is not particularly surprising, but it does put a cap on how far markets can take ECB pricing.”

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TAGS: Pound Euro Forecasts