British Pound Surges Above €1.20 Amid Diverging Economic Recoveries
The British pound has climbed above the crucial €1.20 mark against the euro, fuelled by flash PMIs that reveal a widening gap between the UK and its European counterparts in economic recovery. Political uncertainty is weighing on the euro, while China's contribution to the global risk rally has bolstered the pound, which is seen as pro-cyclical and risk-sensitive.
UK PMI surveys presented mixed results on price indicators, with stronger figures in manufacturing but weaker ones for services prices. On the labour market side, the data showed a decline in employment, as the composite employment index dropped 1.5 points to 50.6. Despite signs of slowing momentum in the UK's recovery at the end of Q3, the headline indices remain strong relative to the rest of Europe. Another contributing factor to the pound's strength is the interest rate differential, with the Bank of England's cautious approach to rate cuts providing a yield advantage that makes the pound attractive to investors. As a result, GBP/EUR is at its highest level since April 2022, up nearly 4% since early August.
The pound has also reached new 31-month highs against the US dollar, trading between $1.33 and $1.34. With limited technical resistance until $1.35 and the euro looking less appealing, the pound is well-positioned to benefit from any further weakness in the dollar.
Euro Slips Below $1.11 Amid Rising Concerns Over ECB Monetary Easing
The euro briefly dipped below $1.11 on Monday as fears intensified that the European Central Bank (ECB) may need to accelerate monetary easing to address the weakening Eurozone economy. The flash Eurozone composite PMI fell for the fourth consecutive month, dropping to 48.9 in September—its lowest level since January—from 51 in August. This marked the first contraction in private sector activity in seven months. Manufacturing output continued to struggle, particularly in Germany and France, declining for the 18th straight month (44.5 vs. 45.8). The services sector, which had been supporting the economy, also experienced a sharp slowdown, especially in France. Additionally, input cost inflation hit its lowest level since November 2020, while output prices saw their smallest rise since February 2021.
In response to the weak PMI data, market expectations for an ECB rate cut in October increased, with the OIS curve now pricing in a 10bps cut, up from 6bps last week. Around 50bps of cuts are now anticipated by the end of the year, signalling the possibility of a larger rate cut in December if no action is taken soon. However, several hawkish ECB members, such as Kazaks, have opposed immediate cuts, emphasizing the ongoing challenge of persistent inflation, particularly in the services sector. Kazaks also raised concerns about the risks of keeping rates too high for too long, echoing the warnings of Centeno, a dovish ECB member, who last week highlighted the threats to economic growth.
