• Pound (GBP) declines as the UK entered 3rd national lockdown
  • UK Service sector PMI expected 49.9
  • Euro (EUR) supported by strong German retail sales
  • Eurozone service sector PMI expected 47.3

The Pound Euro (GBP/EUR) exchange rate is edging lower after a flat finish on Tuesday. The pair settled just 4 pips lower in the previous session at €1.1075 in the middle of the daily range. At 05:15 UTC, GBP/EUR trades -0.07% at €1.1067.

The Pound kept a negative bias as the UK entered its third national lockdown in 9 months. Chancellor Rishi Sunak announced a £4.6 billion support package for businesses which will help soften the blow to the UK economy which is almost certainly heading for a double dip recession.

GDP is expected to have contracted in the final quarter of 2020 and the first quarter of 2021. However, the contraction is expected to be softer than the 25% fall in output seen in the first two months of the first lockdown as businesses are better adapted to working remotely. Construction sites and factories remain open.

Today attention will be on the service sector PMI reading. The service sector has been hit harder by the pandemic than the manufacturing sector, particularly hospitality and leisure. Even so the December flash estimate showed that the sector remained resilient despite tightening lockdown restrictions.  Expectations are for confirmation of the 49.9 reading whereby 50 separates expansion from contraction.

The Euro strengthened in the previous session, boosted by the weaker US Dollar and by encouraging Eurozone data. German retail sales unexpectedly increased 1.9% month on month in November, smashing expectations of a 2% decline even though the country was in partial lockdown.

Separately German jobless numbers also fell last month defying expectations as the number of jobless fell 37,000 year on year in December. The figures suggest that Europe’s largest economy has weathered the pandemic surprisingly well, which bodes well for the coming year.

Attention will now turn to service sector PMI data for December, which is expected to confirm the flash estimate of 47.3 a slower rate of contraction than in November. This is in stark contrast to the manufacturing sector which is firmly in expansionary territory.