EUR/GBP Sets 2023 Lows & Bounces Around after Abysmal PMIs

Poor PMIs

Today's abysmal preliminary PMI's from Europe and the United Kingdom sparked volatility and two-way action in EUR/GBP. It initially breached 0.8500 on the downside, for the first time in a year, but the UK figures that followed, sent it higher.

The preliminary Composite PMIs for August showed the biggest contraction in around three years and the height of the pandemic, for Germany, Eurozone and the UK. These figures aggravate fears around the performance of those economies, which create pressure for a less aggressive stance by the respective central banks, which in turn poses a headwind for the Euro and the Pound.

European Central Bank

The ECB has been very hawkish since the July 2022 lift-off, having delivered 425 basis points worth of hikes. Despite the significant amount of tightening, it likely has more ground to cover, as inflation is still far from the 2% target. On the other hand, Europe's economic engine is sputtering since Germany is in a technical recession, with negative GDP in Q4 2022 and Q1 2023. This raises the threshold for more rate increases and Ms Lagarde opened the door to a September pause in last month's press conference.

Bank of England

The BoE has been raising rates non-stop since December 2021, with the cumulative tightening amounting to 515 basis points. However, inflation is still elevated and wages growth at historical highs, keeping the pressure for more rate increases. Policymakers have not committed to such action though and the continued hikes create fears that the BoE may break something in its effort to mitigate the highs costs of living.

EUR/GBP Analysis

Today's PMIs highlighted the problems that both economies face and central bank members may feel some apprehension around further tightening, which has been a source of strength for both the Euro and the Pound.

EUR/GBP initially set new 2023 lows, breaking the bottom border of its summer range (grey rectangle), with the pair already having a bad year. This creates scope for further losses and bring 0.8338 in the spotlight, although a test may prove elusive in the near term.

The UK figures that followed changed the situation, sending EUR/GBP higher and into profitable territory. The common currency now has the chance to reclaim the EMA200 (at around 0.8590), which could pause the downside bias. It does not inspire confidence though for sustained strength that would send it beyond 0.8702.

The monetary policy differential will likely determine the pair's trajectory, but the outlook is uncertain. Both central banks have reason to contemplate holding, but inflation is still high, creating need for further tightening.