Euro stabilizes against British Pound as weak UK PMIs contrast with resilient Eurozone activity

• EUR/GBP steadies after Monday's sharp decline sparked by UK Prime Minister Keir Starmer's resignation.
• Weak UK PMI data contrasts with stronger-than-expected Eurozone business activity figures.
• Markets eye UK political developments and central bank signals for a fresh direction.

EUR/GBP trades little changed on Tuesday after a sharp slide the previous day, triggered by UK Prime Minister Keir Starmer's resignation, which lifted the British Pound (GBP) across the board. At the time of writing, the cross trades around 0.8624 after hitting an intraday low of 0.8615, its lowest level since March 20.

The subdued price action comes as traders digest weaker UK economic data. Preliminary S&P Global Purchasing Managers Index (PMI) readings released on Tuesday missed expectations across the board.

The Composite PMI slipped to 49.4 from 49.7, the Services PMI fell to 48.7 from 49.3, and the Manufacturing PMI eased to 53.1 from 53.9.

In contrast, preliminary HCOB PMI data from the Eurozone came in above expectations, offering some support to the Euro (EUR). The Composite PMI rose to 49.5 from 48.5, the Services PMI improved to 48.9 from 47.7, while the Manufacturing PMI edged down to 51.3 from 51.6.

Meanwhile, traders also parsed comments from Bank of England (BoE) and European Central Bank (ECB) officials. BoE policymaker Alan Taylor said that "the UK has a weak economy and already restrictive policy" and added that the Bank Rate is "75 bps above my estimate of neutral." He warned that if more slack opens up, policymakers "may end up having to cut quickly" and could even see Bank Rate "below neutral for a while."

ECB Governing Council member Boris Vujčić said on Tuesday that "Eurozone growth has proven more resilient in the face of supply shocks than people expected." ECB Chief Economist Philip Lane said the central bank "has to remain attentive to risks on both sides of the outlook" and warned that higher energy prices are expected to keep inflation "well above target into the first half of 2027."

Looking ahead, traders will keep a close eye on political developments in the UK, with Andy Burnham now seen as the leading candidate to replace Starmer. Commerzbank analyst Michael Pfister said Burnham "will endeavour not to unsettle the markets too much" and noted that "if he succeeds in maintaining the status quo, the pound will react positively."

However, Pfister warned that "if he calls the fiscal rules into question, the pound is likely to depreciate significantly." Given these political risks, he said Commerzbank remains sceptical about Sterling for the time being and expects EUR/GBP to target higher levels in the coming weeks if the BoE leaves interest rates unchanged while the ECB delivers another rate increase in September.