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Euro Pound Exchange Rate Fails to Capitalise on Weaker UK Services PMI

A slight weakening in the Eurozone services PMI for May limited the support for the Euro at the start of the week, denting confidence in the outlook of the currency union.

Although economic activity across the Eurozone remained relatively solid, with private sector growth rising to a six-year high, this was not enough to boost the appeal of the single currency.

Worries over Greece are continuing to drag on market sentiment as a resolution to the ongoing debt crisis saga remains elusive, given that creditors are still at odds over the prospect of debt relief.

These concerns are unlikely to abate unless the Eurogroup approves the next tranche of bailout funds at its June meeting, with the threat of a fresh crisis still hanging over the single currency

Demand for the Euro could pick up if the latest European Central Bank (ECB) policy meeting proves encouraging, even though no change in monetary policy seems likely.

If ECB President Mario Draghi takes a more optimistic view, given the strength of recent growth data, this may encourage the Euro Pound exchange rate to return to a bullish run.

On the other hand, any fresh expressions of doubt or talking down of any prospective tapering of the quantitative easing program could dent the appeal of the Euro.

Confidence in the Pound remains muted ahead of Thursday’s general election, meanwhile, with the latest polls suggesting a further narrowing of the Conservatives’ lead over Labour.

Election jitters are likely to benefit the EUR GBP exchange rate in the near term, at least, as the outcome of the vote still looks rather uncertain.

As Jack Di-Lizia, strategist at Deutsche Bank, noted:

‘The recent tightening in the polls has increased the probability of outcomes aside from an increased Conservative majority. The anticipated market impact varies widely by scenario, from a rally in the case of a reduced Conservative majority to a sharp sell-off in the event of a Labour majority.’

Either way, Sterling is likely to experience increased volatility once the actual results of the election start to come through.

Regardless of the outcome, however, the uncertainty of Brexit and upcoming negotiations with EU officials looks set to keep the Pound under pressure for some time to come.

May’s weaker-than-expected UK services PMI also undermined the appeal of the Pound, with the index slowing from 55.8 to 53.8.

While this remains solidly in growth territory, well above the neutral baseline of 50, this softening nevertheless indicates that the main engine of the UK economy is not in such robust health.

Current EUR GBP Interbank Exchange Rates

At the time of writing, the Euro Pound exchange rate was trending lower at 0.8737. Meanwhile, the Pound Euro exchange rate was making modest gains in the region of 1.1445.