Pound to Euro Rate On Course for 1.17 After UK PMI and Consumer Confidence Improvement

The British Pound rose against the Euro ahead of the weekend after UK survey data pointed to a more upbeat picture of the economy in December, while a similar survey of the Eurozone warned of economic contraction.

The S&P PMI survey showed services sector activity increased in December, building on November's improvement and raising the odds that a recession will be avoided.

The services PMI read at 52.7, well above November's 50.9 and the expectation for 51. 

The composite PMI, which assesses the broader economy, read at 51.7, suggesting the economy is comfortably in expansionary territory. The market was expecting 50.9, a shave higher than November's 50.7.

These data contrast with the Eurozone's composite figure - released half an hour earlier - of 47, which was below consensus estimates and points to an ongoing contraction in the bloc.

The contrasting fortunes create a clear gulf between the UK and Eurozone economies that supports the Pound to Euro exchange rate, which has jumped a third of a per cent to 1.1650.

"We see this as a more positive backdrop for sterling than the euro over coming months, a sentiment seemingly shared by markets this morning. GBPEUR is almost half a percent following this morning's prints, and now well on track for our year-end target of 1.17," says Nick Rees, FX Market Analyst at Monex Europe.

"The Euro Area economy appears to be barrelling towards a technical recession in Q4," says Matthew Ryan, Head of Market Strategy at Ebury. "By contrast, the UK economy looks to be in a much healthier state... this should both quell investor concerns surrounding the possibility of a UK recession and vindicate the Bank of England’s ‘higher for longer’ stance on interest rates."

The Pound to Dollar exchange rate is higher by 0.10% at 1.2777, taking its two-day gain to 1.70%.

S&P Global says UK business activity was supported by a renewed improvement in order books, alongside efforts to work through post-pandemic backlogs.

Meanwhile, the survey confirms that the Bank of England is right to be worried about persistent inflationary pressures in the services industry.

S&P Global reports input cost inflation increased to its highest since August, driven by another sharp rise in operating expenses at service sector companies. This was widely linked to rising salary payments.

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"The increase in input costs shows inflation is proving stickier than hoped and indicates there is still some way to go before costs stabilise," says John Glen, Chief Economist at CIPS.

The Bank of England kept interest rates unchanged on Thursday and warned rates could rise again owing to fears of ongoing inflation pressures linked to wages, particularly in services.

The Pound rose in response to this message, and Friday's findings from the PMI survey give the Bank's stance added credibility.

December data also indicated that UK private sector firms are optimistic overall about their own growth prospects for 2024.

It's not just businesses that are increasingly optimistic about the next year; consumers are also more chipper.

The recovery in consumer confidence extended into December, according to GfK's composite index of consumers' confidence, which rose to -22 in December from -24 in November. November had seen a marked improvement on October's reading, which suggests a trend is establishing. 

"The ongoing recovery in consumers’ confidence adds weight to our view that households’ spending will partially rebound in Q4, supported by an increase in real wages," says Gabriella Dickens, Senior UK Economist at Pantheon Macroeconomics.