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EUR GBP Exchange Rallies as UK Services PMI Surges, But Will Growth Still Suffer in Q1?

The Euro Pound (EUR GBP) exchange rate mounted a recovery this morning as the UK’s latest Services PMI beat expectations.

Data compiled by analytics firm IHS Markit reported that the UK’s private sector enjoyed a better than expected end to the first quarter as activity jumped from 53.3 to 55.0, comfortably sailing past a predicted 0.2% rise and reaching its highest levels in 2017.

Of the managers surveyed the majority were confident that activity would remain robust over the next twelve months, with just under half forecasting that their businesses would grow over the next year, with some firms benefiting from greater demand from overseas thanks to the weaker Pound.

However analysts remain wary of the UK’s first quarter growth, as they warn that that the downturn in Britain’s consumer related sectors at the start of the year is likely to prevent any uptick in GDP.

Chris Williamson, Chief Business Economist at IHS Markit, said;

‘The survey data indicates that UK business activity growth regained some momentum after having slipped to a five-month low in February, but the upturn fails to change the picture of an economy that slowed in the first quarter.’

Markets were also worried about the report that businesses had raised their prices for the fastest pace in eight years and while consumer demand currently appears resilient enough to absorb the increase, investors fear that poor wage growth will lead to household tightening their belts over the next quarter.

Meanwhile the Eurozone released its own services PMI this morning with activity in the bloc’s private sector leaping from 55.5 to a six-year high of 56.0 last month.

However EUR GBP gained little ground following the release as it fell behind expectations that the PMI figures would rise to 56.5.

The disappointing result looks to have been largely prompted by Italy as activity in the country’s services sector unexpected slipped in March, falling from 54.1 to 52.9.

While the PMI may have fallen short of expectations, analysts were upbeat about the data’s employment growth figures as they rose as their fastest pace in over nine years and painted an upbeat picture for future growth, as Markit’s Chris Williamson explained;

‘Most welcome for a region still suffering near- double digit unemployment is a rise in the survey’s employment index to its highest for almost a decade, suggesting we should expect to see the jobless rate fall further in coming months.’

Looking ahead the EUR GBP exchange rate may fall further on Thursday if European Central Bank (ECB) president, Mario Draghi strikes a more dovish tone, following comments from a central bank policymaker last week that suggested that markets had ‘overinterupted’ Draghi’s statement following March’s policy meeting.

Meanwhile the Pound is also likely to slide on Friday as the UK’s latest Trade Balance figures are expected to show that Britain’s trade deficit rose from £1.97bn during the month of February.

However Sterling’s fall may be slowed if the UK’s Manufacturing and Industrial Production figures show a notable improvement over the same period as analysts predict.

Current Interbank Exchange Rates

At the time of writing the EUR GBP exchange rate was trending around 0.85 and the GBP EUR exchange rate was trending around 1.16.