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Pound Euro Exchange Rate Slips as UK Business Optimism Index Plunges to -22

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Plunge in UK Business Optimism Dents Pound Euro Exchange Rate

As the CBI business optimism index weakened further than forecast in the first quarter the Pound to Euro (GBP/EUR) exchange rate returned to the back foot.

The index plunged from 0 to -22 on the quarter, highlighting the increasing negative impact of the Covid-19 crisis on UK businesses.

With signs increasingly pointing towards the economy struggling to regain any of its lost momentum in the early months of 2021 the mood towards Pound Sterling (GBP) naturally soured.

Growing fears that the UK could face another quarterly growth contraction in the first quarter weighed heavily on GBP exchange rates, even as the wider sense of market sentiment improved.

The European Central Bank’s (ECB) decision to leave monetary policy on hold helped to keep a floor under the Euro (EUR), meanwhile.

Negative UK Services PMI Set to Limit Pound Appeal Further

Support for the Pound could weaken further ahead of the weekend if January’s UK manufacturing and services PMIs fail to impress.

Although forecasts suggest that the manufacturing sector continued to deliver solid growth this month a negative service sector reading could see the GBP/EUR exchange rate slump.

As the service sector remains the primary growth engine of the UK economy anything short of a return to positive expansion territory may leave the Pound under pressure.

Markets expect to see the services PMI weaken from 49.4 to 45 on the month, however, offering fresh evidence of pandemic disruption.

With the current lockdown looking set to drag on economic momentum for the foreseeable future any weakness here could see the Pound trending sharply lower across the board on Friday.

Mixed Eurozone PMIs Forecast to Drive Euro Exchange Rate Volatility

On the other hand, the Euro also looks set for volatility on the back of the latest set of Eurozone manufacturing and services PMIs.

Confidence in the underlying resilience of the currency union could improve on the back of another solid month of manufacturing sector readings.

As long as the manufacturing PMIs remain firmly planted in positive territory the potential for any EUR exchange rate losses are likely to diminish.

However, the GBP/EUR exchange rate could find some support if the Eurozone service sector shows fresh signs of slowdown.

Although a strong manufacturing sector performance could easily overshadow another weak month for the services PMI this may still put a dampener on the Euro.

Elevated levels of market risk appetite could continue to support the single currency, meanwhile, as optimism over the new US administration pushes the US Dollar (USD) lower across the board.