Pound-to-Euro Helped by UK-EZ PMI Divergence


Above: Renault electric vehicle assembly in Douai, France. Eurozone manufacturing continued to improve in May. Image © EC - Audiovisual Service


The Eurozone PMI missed expectations, the UK's beat expectations.

The Pound to Euro exchange rate (GBP/EUR) is recovering from recent lows, helped by new economic survey data that showed divergent fortunes for the UK and Eurozone economies in May.

The UK's composite PMI - a survey of private sector activity that is closely watched by markets and analysts alike - rose to 49.4 in May, up from 48.5 in April, beating expectations for 49.3.

By contrast, the Eurozone's composite PMI fell to 49.5 from 50.4, undershooting expectations for 50.7.

Markets are responsive to diverging economic fortunes, and there has been a bid for Pound Sterling as a result: Pound-Euro traded as low as 1.1823 ahead of the print, but has risen to 1.1860 through the course of the Thursday session.

"The UK composite PMI output index for May rose to 49.4, after a large fall in April. We had expected a rise, after tariff news likely affected activity in April, but positive news from UK trade deals with India and the US may have boosted activity in today's reading," says Josie Anderson, European Economist at Nomura.

The UK services sector - the economy's largest - saw its PMI rise to 50.2 from 49, beating an estimate of 50. However, manufacturing remains under pressure, with another contractionary reading of 45.1.

In the Eurozone, services disappointed at 48.9, down from 50.1 in April. However, a manufacturing recovery continues and the sector's reading of 49.4 suggests it could soon emerge into contractionary territory (i.e. a reading above 50).

Despite this manufacturing recovery, it is the composite PMI measure that the European Central Bank will watch, and it might be inclined to cut interest rates further to support economic activity.

"The Eurozone economy remains unable to achieve lift-off," says Salomon Fiedler, an economist at Berenberg Bank. "If aggregate demand were to take a sharper-than-expected turn for the worse, the ECB would also be in a better position to provide support via additional rate cuts."

The Bank of England might welcome today's UK PMI recovery as a sign that the economy does not need immediate support, allowing it to forgo a rate cut in August.

This is how the data divergence theme works for FX: it's essentially a theme on central bank divergence. More cuts at the ECB and less at the Bank of England is a supportive divergence that points to GBP/EUR upside.

"Due to high inflation pressure, both the Fed and the Bank of England cannot afford to cut further this year," says Fiedler.

However, the outlook for the Pound is not quite so clear-cut: rising UK bond yields and inflation make the UK's situation quite precarious, and we worry that the Pound might soon stop following the central bank divergence theme if worries about the UK's debt dynamics persist.

Add to this the fact that the Euro tends to benefit the most during periods of "sell America" volatility, and we report today that a major bank thinks more such days lie ahead.

Pound-Euro upside might yet prove elusive.


Horizon Currency Ltd
Albany House
40 Shute End
Wokingham
RG40 1BJ Companies House Registration: 11242368

Horizon Currency's payment and foreign currency exchange services are provided by:

Global Currency Exchange Network Ltd T/A GC Partners. Global Currency Exchange Network Ltd is authorised by the FCA under the Payment Services Regulations, 2017 (FRN: 504346). Registered as a Money Services Business, regulated by HM Revenue & Customs ("HMRC") under the Money Laundering Regulations 2017. (Registration number is 12137189). Registered in England and Wales. Company number 04675786. Registered Office 3rd Floor 100 New Bond Street, London, England, W1S 1SP.

Payment Services are provided by Equals Connect Limited, registered in England and Wales (registered no. 07131446). Registered Office: Vintners’ Place, 68 Upper Thames St, London, EC4V 3BJ. Equals Connect Limited are authorised by the Financial Conduct Authority to provide payment services (FRN: 671508).