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GBP/EUR Exchange Rate Dips as USD Weakness Benefits the Euro

GBP/EUR Exchange Rate Undermined by USD Slump 

The Pound to Euro (GBP/EUR) exchange rate has suffered modest losses this morning, as broad weakness in the US Dollar (USD) helps to boost the single currency. 

At the time of writing the GBP/EUR exchange rate is trading at around €1.1056, slightly down from today’s opening levels. 

Euro (EUR) Buoyed by USD Weakness in Spite of Lacklustre PMI Figures 

The Euro (EUR) is trending higher against the Pound (GBP) this morning, as the single currency’s negative correlation with the US Dollar (USD) sees the broad weakness in the ‘Greenback’ bolster the appeal of the Euro. 

This slump in the US Dollar comes amid a positive market mood, driven by hopes that the Democrats will enjoy a clean sweep in Georgia’s Senate runoff, picking up both seats and paving the way for the incoming Biden administration to push through more fiscal stimulus and government spending. 

However the upside in the single currency has been limited somewhat by the publication of the Eurozone’s latest PMI release. 

December’s finalised figures confirmed that private sector activity in the bloc continued to contract last month and at a slightly faster pace than previously thought. 

Chris Williamson, Chief Business Economist at IHS Markit said: 

‘The eurozone economy contracted for a second successive month in December, deteriorating at a slightly faster rate than previously thought at the end of the year due to intensifying COVID-19 restrictions.  

‘Service sector activity in particular fell more sharply than estimated by the earlier ’flash’ PMI estimate, as more countries stepped up their fights against rising virus case numbers.’ 

Pound (GBP) Muted as UK Services Sector Contracts 

Meanwhile, the Pound (GBP) is mostly directionless this morning after the UK’s own PMI figures were revised slightly lower. 

According to data published by IHS Markit, the UK’s services index hit 49.4 in December, down from a preliminary estimate of 49.9. 

This marks the second month of consecutive contraction in the UK’s vital service sector, after the index struck 47.6 in November, during the UK’s previous lockdown. 

With most parts of the country now facing an even stricter lockdown for at least the next month and a half, analysts warn that there is more weakness ahead. 

Tim Moore, Economics Director at IHS Markit, commented: 

‘”With a third national lockdown underway, service providers will be braced for a sustained period of subdued UK economic conditions and deferred client spending in the first quarter of this year.’ 

GBP/EUR Forecast: Weak German Inflation to Weaken the Euro? 

Looking ahead, the Pound to Euro (GBP/EUR) exchange rate may strengthen later this afternoon, following the publication of Germany’s consumer price index. 

December’s CPI release is expected to show that the Eurozone’s largest economy suffered its fourth consecutive month of deflation, and dent the appeal of the single currency. 

At the same time, the Pound could face some pressure later today as Bank of England (BoE) Governor Andrew Bailey is scheduled to speak at a Treasury select committee. 

Bailey will no doubt be pressed on the BoE’s take on the new lockdown measures and their likely impact on the UK economy, with Sterling sentiment set to weaken if Bailey concedes that the BoE’s growth forecasts for 2021 will need to be revised lower.