Euro rallies against a weak British Pound as UK business activity disappoints
- EUR/GBP accelerates its recovery and nears 0.8600 amid broad-based Pound's weakness.
- UK business activity slowed in September amid higher inflationary pressures.
- In the Eurozone, Services activity improved beyond expectations while the manufacturing sector grew at a steady pace.
The Euro (EUR) accelerates its recovery against the British Pound (GBP) on Wednesday as mixed UK Purchasing Managers' Index (PMI) figures reveal that inflationary pressures have weighed heavily on business activity in September. The EUR/GBP pair hit session highs at 0.8590, drawing closer to the top of the monthly range, at the 0.8600 area.
Preliminary UK S&P Global Purchasing Managers' Index (PMI) data showed that manufacturing activity improved to 52.0 in September from 51.7 in August, against expectations of a mild slowdown to 51.6. Services activity, on the other hand, slowed down to 51.7, from 52.5 in the previous month, below the 52.0 market consensus. This has pushed the Composite Index down to 51.7 in September, from 52.5 in the previous month.
The report highlights that the rate of input price inflation accelerated for the second month running to its highest since June, and underscores survey respondents’ complaints about increased energy, fuel and raw material costs.
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, affirmed that “September is seeing a worrying combination of disappointingly sluggish economic growth and intensifying inflationary pressures, with subdued business confidence and high costs meanwhile continuing to discourage hiring.”
Eurozone PMIs beat expectations in September
Eurozone data, on the other hand, has been more supportive. The Preliminary Eurozone Services PMI improved to 53.0, its highest level in 10 months, beating expectations of a 51.7 reading, while Manufacturing PMI remained steady at 52.7, in line with the market consensus.
In Germany, the services sector’s activity improved to 52.9 after five months of contraction, also beating expectations of a 50.0 reading. Manufacturing activity, on the other hand, slowed down to 53.8, from 54.3, although still at levels consistent with solid business activity.
The Euro, however, is facing pressure from growing uncertainty in Germany, following the disastrous results of the ruling CDU party in state elections this week, which have put Chancellor Frederich Merz’s leadership into question. Beyond that, France’s public debt has reached its highest levels since 1978 and is expected to keep growing in the coming months amid the spiralling borrowing costs, which threaten to unleash a credit crisis.
Pound Sterling FAQs
The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, also known as ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).
The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.
Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.
Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
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