Pound Euro (GBP/EUR) Exchange Rate Slips as Weak UK Services PMI Raises Odds of Economic Contraction
As the UK service sector joined both the manufacturing and construction sectors in a state of contraction the Pound Sterling to Euro (GBP/EUR) exchange rate remained on the back foot.
Rather than holding relatively steady at 50.3 the services PMI instead slumped to 49.5 as the sector failed to deliver any growth on the month.
With September’s trio of PMIs all demonstrating fresh signs of deterioration confidence in the outlook of the UK economy naturally diminished.
Commenting on the report, Chris Williamson, Chief Business Economist at IHS Markit, noted:
‘Only the collapse in confidence immediately following the 2016 referendum has seen a steeper overall deterioration in the economy during the past decade, but September’s decline is all the more ominous, being the result of an insidious weakening of demand over the past year rather than a sudden shock.’
As investors braced against the prospect of the economy faltering in the third quarter the mood towards Pound Sterling (GBP) soured.
Disappointing Eurozone Services Performance Drags on Euro (EUR)
While August’s Eurozone retail sales data demonstrated solid levels of consumer spending this failed to give the Euro (EUR) any significant boost.
Although domestic demand showed signs of picking up this was overshadowed by the underwhelming nature of September’s finalised Eurozone PMIs.
A sharp downgrade to the German services PMI offered particular cause for concern, with the Eurozone’s powerhouse economy looking increasingly set to enter a technical recession.
Thanks to the weakness of the month’s German data the overall Eurozone composite PMI clocked in at just 50.1, barely above stagnation.
With the European Central Bank (ECB) already looking set to pursue further monetary loosening in the months ahead this left the single currency exposed to fresh selling pressure.
Commentary from ECB policymakers in the coming days could drive EUR exchange rates lower as the odds of imminent policy action rise.
Brexit Impasse Set to Limit Potential for GBP/EUR Exchange Rate Recovery
With EU officials showing little enthusiasm for Boris Johnson’s ‘final Brexit offer’ the prospect of any imminent progress towards a deal rapidly faded.
As the issue of the Irish border remains unresolved the risk of the UK crashing out of the EU without a deal remains, to the detriment of the Pound.
With the UK economy already showing signs of slowing in the face of ongoing Brexit-based uncertainty the potential for GBP exchange rate gains in the near future appears limited.
Until markets see signs that the two sides could move towards an agreement ahead of the rapidly approaching deadline the Pound is likely to maintain a downside bias.
If negotiations break down further the GBP/EUR exchange rate looks set to fall back towards its earlier lows as concerns over the outlook of the UK economy intensify.