Economic, Political Woes Sap Single Currency Support, Pound to Euro Rate Buying on Dips

September 3, 2024 - Written by John Cameron

STORY LINK Economic, Political Woes Sap Single Currency Support, Pound to Euro Rate Buying on Dips

Economic and Political Woes Sap Euro Support, GBP/EUR Buying on Dips

The Pound to Euro (GBP/EUR) exchange rate has corrected from 5-week highs just above 1.19 posted last week, but the correction remains limited with the pair trading around 1.1870 and seeing solid buying on dips.

The pair will need to break the 1.1910 area to trigger a fresh surge in buying.

At this stage, the UK political and economic fundamentals continue to support the Pound with further Euro-Zone difficulties on both fronts.

The final UK PMI manufacturing reading was unchanged from the flash reading of 52.5 and confirmed at a 26-month high.

There was no change in market narrative with expectations of solid growth in the UK economy and a slow pace of Bank of England interest rate cuts.

Recession and inflation fears will be crucial for Euro sentiment and ECB policy.

The final Euro-Zone PMI manufacturing reading edged higher to 45.8 from the flash reading of 45.6 and unchanged from July, but the sector has been in recession for over two years.

Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, commented “Things are going downhill, and fast. The manufacturing sector has been stuck in a rut, with business conditions worsening at the same solid pace for three straight months, pushing the recession to a gruelling 26 months and counting. New orders, both domestic and international, are slowing down even more, dashing any short-term hopes for a rebound.

There was further upward pressure on costs and a net increase in prices charged for the first time in over a year.

There are very strong expectations that the ECB will cut interest rates at the September policy meeting, but with increased uncertainty over the medium term given inflation concerns.

In this context, there have been reports of growing divisions within the ECB council as members evaluate the balance between inflation and recession risks.

ECB board member Isabel Schnabel commented on Friday; "Monetary policy should remain focused on bringing inflation back to our target in a timely manner. While risks to growth have increased, a soft landing still looks more likely than a recession."

ABN Amro expects weak growth. "The euro zone economic recovery is struggling to gain momentum."

If recession fears dominate, there will be notable Euro vulnerability.

In the latest German state elections, the right-wing Alternative for Germany (AfD) won in Thuringia while the opposition CDU came first in Saxony with the AfD a close second.

There were heavy losses for the governing coalition parties with a strong showing for a new far-left party BSW.

According to MUFG; “Given the performance of the two extreme parties it is clear that Germany is heading slowly toward the very same political outcome as in France – political gridlock.”

A collapse in coalition support will increase pressure for economic stimulus.

ING added; “The upcoming days will show whether these elections functioned as a wake-up call for more powerful economic policies or whether they only worsened the political deadlock.”

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TAGS: Pound Euro Forecasts