The pound crept 0.3 percent higher against the euro this morning following the release of the UK’s latest services PMI. According to data published by IHS Markit, activity in the UK’s all-important service sector showed a modest improvement in December. The index ticked up from 50.4 to 51.2 and coming in slightly above expectations as Brexit anxiety continued to temper growth. With the service sector accounting for roughly 80 per cent of UK growth, the reading also paints a gloomy picture of Britain’s economy at the end of the fourth quarter, with analysts forecasting that the UK will have seen only negligible growth.
Chris Williamson, Chief Business Economist at IHS Markit said: “Combined with disappointing growth in the manufacturing and construction sectors, the meagre service sector expansion recorded in December is indicative of the economy growing by just 0.1 per cent in the closing quarter of 2018.”
At the same time the euro has given up some ground this morning following the publication of the Eurozone’s latest consumer price index.
This comes as a flash reading revealed headline inflation tumbled from 1.9 per cent to 1.6 per cent in December.
Not only did this disappoint investors who had forecasted a more modest drop to 1.8 per cent, but it also comes in well below the European Central Bank’s (ECB) target rate of 2%.
While a robust reading for underlying inflation indicates the drop is likely down to the recent rout in oil prices, it will do little to bolster confidence that the ECB may still target a rate hike in 2019.
Looking ahead to the start of next week’s session, movement in the exchange rate is likely to be driven by the release of the Eurozone’s retail sales figures, with the euro potentially getting off to a strong start if sales growth surged as expected in November.
Meanwhile the majority of the UK’s economic data will be focused on the tail end of the week, with the publication of Britain’s latest trade and GDP reports potentially bolstering the pound if November’s readings are well received.
In the meantime, Sterling is likely to become increasingly volatile as Brexit begins to rear its head once again, with pound investors set to brace for the upcoming parliamentary vote on Theresa May’s Brexit deal.