Pound Euro Exchange Rate News: GBP/EUR Slumps on Lacklustre UK PMIs

January 24, 2023 - Written by John Cameron

STORY LINK Pound Euro Exchange Rate News: GBP/EUR Slumps on Lacklustre UK PMIs

Pound Euro Exchange Rate Slumps on Disappointing UK PMIs

The Pound Euro (GBP/EUR) exchange rate trended lower on Tuesday as the pairing was pressured by weaker-than-expected UK PMI figures.

This saw the GBP/EUR exchange rate trade at around €1.1330 at the time of writing. Down roughly 0.5% from Tuesday’s opening levels.

Pound (GBP) Slumps as UK Service Sector Slump Deepens

The Pound (GBP) was placed on the defensive on Tuesday following the publication of the UK’s latest PMI figures.

According to preliminary data published by S&P Global the UK’s private sector contracted more than expected this month. The composite index fell from 49 to a two-year low of 47.8, versus forecasts for a modest rise to 49.1.

January’s plunge in business activity was driven by a worrying decline in growth in the UK’s vital service sector. The services PMI fell from 49.9 to 48, offsetting a stronger-than-expected rise in the much smaller manufacturing sector.

The weaker-than-expected PMI release is stoked UK recession fears on Tuesday morning, with investors unsurprisingly shying away from the Pound as result.

Commenting on the flash PMI data, Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said:

‘Weaker than expected PMI numbers in January underscore the risk of the UK slipping into recession. Industrial disputes, staff shortages, export losses, the rising cost of living and higher interest rates all meant the rate of economic decline gathered pace again at the start of the year. Jobs also continued to be lost as firms tightened their belts in the face of these headwinds, though many other firms reported being constrained by an ongoing lack of available labour.’

However, there was a small ray of hope for GBP investors as the PMIs highlighted that firm’s growth expectations have rebounded amid alleviating inflationary pressures.

Euro (EUR) Buoyed as Eurozone Private Sector Returns to Growth

The Euro (EUR) firmed on Tuesday as the Eurozone’s own PMI releases beat expectations and revealed the Eurozone’s private sector returned to growth for the first time in seven months.

S&P Global reported the Eurozone’s composite PMI climbed back into expansion territory, as it ticked up from 49.3 to 50.2. This rebound was linked to stronger-than-expected manufacturing and service sector activity.

In addition to easing Eurozone recession fears the return to growth is seen as bolstering the odds for a 50bps interest rate hike from the European Central Bank (ECB) at its February policy meeting next week.

Bert Colijn, senior eurozone economist at ING, commented:

‘The jump in the composite PMI from 49.3 to 50.2 indicates that the economy is performing better than expected. Businesses are experiencing fewer cost pressures than before, but selling prices remain high. For the ECB, this should seal the deal for a 50 basis point hike next week.’

However the upside in the Euro was tempered somewhat by its negative correlation with the US Dollar as the latter also strengthened on Tuesday.

GBP/EUR Exchange Rate Forecast: Bump in German Business Confidence to Extend Euro Gains?

Looking ahead to Wednesday’s trading session, the Pound Euro (GBP/EUR) exchange rate could come under additional selling pressure with the publication of Germany’s latest IFO business climate index.

January’s index is expected to report business sentiment in the Eurozone’s largest economy continues to improve, likely buoying EUR exchange rates in the process.

Meanwhile, in the absence of any notable GBP data releases, movement in the Pound may be driven by domestic headlines. Growing concern over upcoming industrial action in the UK and the potential disruption to economic growth could weigh on Sterling sentiment.

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