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Pound Sterling Euro (GBP/EUR) Exchange Rate Struggles on Lacklustre UK Services Growth

Service Sector Rebound Unable to Shore up Pound Sterling Euro (GBP/EUR) Exchange Rate

A modest return to growth seen in April’s UK services PMI failed to encourage any rally for the Pound Sterling to Euro (GBP/EUR) exchange rate this morning.

Even though the index bounced back from March’s surprise contraction, picking up from 48.9 to 50.4, this was not enough to bolster confidence in the outlook of the UK economy.

As Chris Williamson, Chief Business Economist at IHS Markit, commented:

‘A near-stagnant service sector in April means that all three major parts of the economy were struggling to grow in April. Although the service sector joined construction in reporting a return to growth, in both cases the expansions were only marginal. An upturn in manufacturing is meanwhile showing signs of waning, as a temporary boost from Brexit-related stockpiling faded in April.’

This left Pound Sterling (GBP) on a weak footing against its rivals, even as Bank of England (BoE) deputy governor Ben Broadbent signalled that markets are under-pricing the course of future interest rate hikes.

Euro (EUR) Exchange Rates Fail to Benefit from Eurozone Inflation Uptick

However, a sharp uptick in the Eurozone consumer price index had a limited positive impact on the Euro (EUR).

Although the headline inflation rate accelerated from 1.4% to 1.7% on the year in April, moving closer to the European Central Bank’s (ECB) 2% target, EUR exchange rates remained under pressure.

Investors are concerned that this uptick in inflation will prove transitory, with the sharp increase largely attributed to an Easter boost.

With markets convinced that inflation remains biased to the downside in the months ahead the mood towards the Euro proved generally bearish ahead of the weekend.

However, this was not enough to shore up the GBP/EUR exchange rate in spite of lingering concerns over the outlook of the Eurozone economy.

Signs of Weakening Eurozone Consumer Confidence to Weigh on Euro (EUR)

April’s finalised raft of Eurozone services PMIs look set to confirm a modest pace of growth on the month on Monday, limiting the potential for a single currency rally.

Given the continued weakness of the manufacturing sector any fresh signs of strength within the services PMIs could still offer a boost to the Euro.

EUR exchange rates may come under fresh pressure, however, as forecasts point towards a slowdown in Eurozone retail sales.

If consumer spending shows evidence of easing the mood towards the Euro could sour, with resilient consumer sentiment having previously helped to offset the weakening manufacturing data.

Signs of diminished domestic confidence would leave EUR exchange rates exposed to downside pressure as the case for ECB dovishness improves.

Demand for the Pound, meanwhile, could pick up on the back of any fresh Brexit developments as investors look for signs of a breakthrough in talks between Labour and the Conservatives.