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Pound Euro Exchange Rate Sees Limited Gains on German Economic Sentiment Surge

Stronger German Economic Sentiment Limits Pound Euro Exchange Rate Upside

The Pound to Euro (GBP/EUR) exchange rate began to shake off some of the impact of the unexpectedly improved German ZEW economic sentiment index.

Although the index surged from 61.8 to 71.2 on the month in February this failed to keep the Euro (EUR) on a stronger footing for long.

While this improvement suggests that economic confidence within the Eurozone’s powerhouse economy has strengthened the lingering risk of a double-dip recession remains.

Lingering doubts over the strength of the Eurozone economic outlook and a stronger US Dollar (USD) both served to limit the upside potential of EUR exchange rates at this stage.

Even a slight upward revision to the second estimate of the fourth quarter gross domestic product was not enough to shore up the Euro on Tuesday.

Softer UK Inflation Rate Set to Weigh on Pound Demand

However, the GBP/EUR exchange rate may struggle to hold onto a positive footing for long with the release of the latest UK inflation data.

Forecasts point towards the headline inflation rate softening in January, pushing the rate further away from the Bank of England’s (BoE) 2% target.

With the monthly inflation rate also expected to fall into negative territory the appeal of Pound Sterling (GBP) looks set to weaken once again.

Weaker inflationary pressure would give the central bank greater cause for caution in the months ahead, keeping the possibility of fresh policy action on the table.

Unless the inflation data can defy expectations and show that price pressures picked up at the start of the year, in spite of the national lockdown, the mood towards the Pound appears set to sour.

Euro Vulnerable to Underwhelming Eurozone PMIs

Greater weakness could be in store for the Euro heading into the weekend, though, thanks to February’s raft of Eurozone PMIs.

With the services PMIs expected to remain in a state of contraction across the board this may offer investors fresh incentive to sell out of the single currency.

While the service sector is only a portion of the Eurozone economy any fresh weakness here would increase the odds of an imminent double-dip recession.

Even so, if the corresponding manufacturing PMIs can demonstrate another solid month of growth in spite of the ongoing Covid-19 crisis this may help to limit the downside potential of the Euro.

With a stronger manufacturing sector likely to offset at least some of the impact of weak services PMIs the Pound to Euro exchange rate could still come under pressure on Friday.