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Pound Euro (GBP/EUR) Exchange Rate Outlook Brightens on UK Service Sector Recovery

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UK Services Sector Continues Rebound – Pound Euro (GBP/EUR) Exchange Rate Storms Ahead

The outlook for the Pound Euro (GBP/EUR) exchange rate improved on Tuesday as investors responded to a better-than-expected UK services sector PMI for last month.

Markit’s services PMI climbed from 52.8 to 54.0 in May, beating the forecast of 53.0 and cementing hopes that the UK’s soft growth in Q1 was merely a temporary blip, rather than evidence of a downward trend.

This is great news for the British economy, with the services sector making up a massive 80% of UK GDP.

Markit’s Chief Business Economist, Chris Williamson, also asserted that the result should make the Bank of England (BoE) more likely to raise interest rates during the summer months though this will be heavily dependent on data continuing to prove upbeat.

Mr Williamson stated:

‘The improvement in service sector activity adds to evidence that the economy is on course to rebound in the second quarter…’

This news gave GBP/EUR a marked push on Tuesday.

Eurozone Services and Retail Sales Disappoint in April – What can we Expect for Euro (EUR) Exchange Rates?

The Euro (EUR) came under pressure on Tuesday, falling as markets reacted to a recent soft Eurozone retail report and a weaker-than-expected services PMI.

According to Eurostat, retail sales in April fell month-on-month from 0.4% to 0.1%, missing the market forecast of a 0.5% rise.

Meanwhile, Markit’s services PMI for May printed at 53.8, very slightly below the forecast of 53.9.

Combined, the overall composite PMI reading fell to an 18-month low, weighing on the near-term outlook for the Eurozone economy.

Chris Williamson discussed:

‘With the economic indicators turning down at the same time as political uncertainty has spiked higher, the euro zone’s outlook has darkened dramatically compared to the sunny forecast seen at the start of the year’.

This is pertinent in that it could pressure the European Central Bank (ECB) to maintain its bond-buying measures beyond September, an outlook that could limit the Euro.

Bank of England Rate Monetary Policy Trajectory – Pound Euro (GBP/EUR) Exchange Rate Forecast

With data from the UK improving in Q2 investors are increasingly pricing in a rate hike from the Bank of England this summer, but many questions remain regarding the timing.

BoE Policymaker Silvana Tenreyro stated on Monday that she expects borrowing costs to rise gradually over the next three years, but delaying could provide a ‘significantly clearer picture’ for the state of the economy.

Most economists polled by Reuters last month expected the bank to wait until August, but investors are simultaneously concerned that political uncertainties regarding Brexit negotiations could leave the Monetary Policy Committee (MPC) dovish.

In this regard, more delays will harm the outlook for the GBP/EUR exchange rate, but if data continues to improve then we could see GBP/EUR rally in the coming months.