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Pound Euro Exchange Rate to Climb on UK Inflationary Pressures?

Pound Coin on Euro Banknote GBP/EUR

GBP/EUR Exchange Rate Wavers amid Elevated Rate Hike Bets

The Pound Euro (GBP/EUR) exchange rate is rangebound this morning as both central banks look to be far from ending tightening cycles.

At time of writing the GBP/EUR exchange rate is around €1.1671, relatively unchanged from this morning’s levels.

Pound (GBP) Undermined by Persistent Recession Concerns

The Pound (GBP) is relatively quiet this morning after the service sector was confirmed to have shown signs of slowing momentum.

The final S&P Global services PMI figure slowed from 55.2 to 53.7 in May, marking the third consecutive month of slowing growth. Amidst inflationary pressures and surging borrowing costs, consumer demand is declining. Business activity and new work both showed a marked slowdown, as the figure pointed to the weakest expansion since March. Tim Moore, Economics Director at S&P, commented on the data:

‘The service sector showed renewed signs of fragility in June as rising interest rates and concerns about the UK economic outlook took their toll on customer demand. Business activity increased at the slowest pace for three months, while the rate of new order growth eased further from April’s recent peak.’

However, despite the slowdown, the figure still shows the service sector in expansion territory. Furthermore, job creation in services leapt to a nine-month high, buoyed by input inflation falling to its lowest level since 2021.

Looking ahead, the trading calendar remains sparse for the rest of the week, so could be exposed to market sentiment. Persistent fears of the Bank of England (BoE) tipping the UK into a recession with relentless tightening could keep a firm lid on Sterling.

Euro (EUR) Pressured by Downbeat Data

Meanwhile, the Euro (EUR) is also failing to find sustained demand amid a souring market mood. Disappointing service PMI data could also be limiting support for the Euro as the final figure was revised lower.

A sharper-than-expected slowdown in the Eurozone service sector could be weighing on the Euro today as PMI was revised to 52.0, compared to estimates of 52.4 and 55.1 in May. Despite signalling growth, it was the weakest since January. Job creation fell to a three-month low, compounded by tumbling business confidence which fell to the lowest in 12 months. Commenting on the data, Dr Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, said:

‘In the services sector, which after a weak final quarter of 2022 had picked up speed at the beginning of the year, all major euro countries have again lost considerable momentum. However, job creation in the service sector last month remained roughly as solid as in the previous month. Overall, there is much to suggest that the slowdown in growth will continue in the coming months.’

Looking ahead, the Euro could slip further if the latest PPI figures show a continued cooling in the Eurozone. With the market expecting another sharp decline in producer prices, further pointing to inflation is finally cooling in Europe, potentially denting rate hike bets.

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