GBP/EUR: Will Service Sector Data Highlight the Growing Divergence Between the Eurozone and UK Econo

05.09.17
3 minute read
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Poor UK economic data and investors moving into the euro to shield from escalating geopolitical tension meant the pound lost ground versus the euro. The pound euro exchange rate was unable to keep above €1.09 and sunk to €1.0865 by the close on Monday.

The mood for the pound weakened after data showed that the UK construction sector almost stagnated in August. Growth in the sector, as measured by the purchasing managers index dropped to 51.1 from 51.9 in July. Concerns over Brexit are weighing on the sector and causing a slowdown in investment in the commercial area. As a result, the sector grew at the slowest pace in 11 months.

Today attention will turn to the service sector. Investors will be looking to see if the most dominant sector in the UK economy is managing to expand in the tough post Brexit climate. City analysts are hoping to see growth in the sector of 53.5, where any figure over 50 indicates expansion. There’s some doubt as to whether this level of growth will be achieved given that high levels of inflation and low wage growth is putting household purses under extreme pressure. Should the service sector grow less than expected, then investors could continue to sell out of the pound.

Why does poor economic data drag on a country’s currency?
Slowing economic indicators point to a slowing economy. Weak economies have weaker currencies because institutions look to reduce investments in countries where growth prospects are low and then transfer money to countries with higher growth prospects. These institutions sell out of their investment and the local currency, thus increasing supply of the currency and pushing down the money’s worth. So, when a country or region has poor economic news, the value of the currency tends to fall.

Eurozone Data Expected to Show Solid Growth in the Bloc

Following further military aggression from North Korea, investors have been looking towards the euro as well as other safe haven currencies. Usually the US dollar is considered a safe haven currency but given the US’s involvement in the potential crisis, investors have instead looked towards the euro as a preferred option, which has resulted in the euro gaining ground.

Looking across today, euro investors are expected to switch their focus away from geopolitical tensions and instead centre on economic data. This morning a deluge of data regarding the service sector of individual countries in the eurozone and the bloc itself will be released. The data is expected to show continued strong growth in the region and could highlight the growing difference between the solid performance of the eurozone economy, compared to the expected weakening of the UK economy. Should this be the case then the euro could take another step higher versus the pound.

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