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Rebounding German Service Sector Shores up Euro Pound Exchange Rate

Even after German factory orders showed an unexpected contraction on the month the Euro Pound exchange rate returned to an uptrend.

A solid rebound in August’s German retail PMI helped to offset this weaker showing, with the index surging from 50.7 to 53.0 as consumer spending picked up once again.

With the Eurozone’s powerhouse economy showing mixed signs, though, market hopes for tomorrow’s European Central Bank (ECB) policy meeting remain rather limited.

This is likely to limit the upside potential of the Euro this week, particularly if policymakers fail to make any indications as to the likely timing of any tapering of its quantitative easing program.

Given previous warnings over the relative strength of the single currency and its negative impact on the Eurozone economy ECB President Mario Draghi could opt to maintain a relatively dovish tone at this juncture.

As analysts at ING noted:

‘The ECB has been struggling to find the right narrative and timing for tapering, which has been further complicated by a strong Euro. Spelling out the tapering game-plan could lead to a stronger Euro, undermining the Eurozone’s recovery.’

With markets keen for any indications of the ECB’s policy outlook even a minor comment on the subject of tapering could be enough to boost the Euro across the board.

On the other hand, any disappointment is likely to drive the EUR GBP exchange rate lower as markets revise their bets for any imminent policy action.

Pound Forecast to Benefit from Narrowed UK Trade Deficit

In the wake of Tuesday’s somewhat disappointing UK services PMI the Pound has struggled to find any sustained support, with the domestic outlook still looking rather muted.

Worries over Brexit are unlikely to ease any time soon, with MPs having returned to parliament and domestic political jitters set to complicate negotiations further.

With the government looking no closer towards achieving any meaningful agreement with the EU on any of the key issues the potential for further Pound downside remains.

However, the EUR GBP exchange rate could come under pressure ahead of the weekend if the latest raft of UK production and trade data proves encouraging.

If the visible trade deficit narrowed in July this could encourage some degree of confidence in the domestic outlook, suggesting that the economy’s exposure to GBP exchange rate weakness is diminishing.

Even so, unless the NIESR gross domestic product estimate for the three months to August points towards a rebound in growth the Pound may struggle to gain any sustained support.

Current EUR GBP Interbank Exchange Rates

At the time of writing, the Euro Pound exchange rate was making modest gains at 0.9155. Meanwhile, the Pound Euro exchange rate was slumped in the region of 1.0918.