Pound Euro (GBP/EUR) Exchange Rate Mixed amid PMI Results and Bond Market Movements
The Pound Euro (GBP/EUR) exchange rate wavered this morning amid selling around both currencies as investors react to the final PMI results and movements in the UK government bond market.
At the time of writing, GBP/EUR is trading at around €1.1483, having fluctuated in a narrow range since trade began.
Pound (GBP) Pressured as Bond Yields Rise Again
The Pound (GBP) slipped this morning, retreating from recent highs against many of its peers, as government gilt yields began to rise again.
Yields on government bonds rose sharply following Chancellor Kwasi Kwarteng’s mini-budget almost two weeks ago. Worries about unmanageable government debt saw a sell-off in the gilt market, driving up bond yields and the cost of government borrowing. This forced the Bank of England (BoE) to stage an intervention, which calmed markets and reassured investors.
This morning, however, bonds began selling off once again. At the time of writing, the 30-year bond yield is up 30 basis points and the 20-year yield is up 20 bps – both noticeable spikes.
As bond yields rise, so do interest repayment costs on government debt. Rising bond yields could make it far harder for the government to balance the books.
In addition, it piles more pressure on the BoE to stage further interventions, perhaps with an emergency interest rate rise, which could choke off the UK economy and make the looming recession even worse.
While this was weighing on GBP, the UK’s final services PMI offered a slight ray of hope. The PMI was revised up from 49.2 to 50, showing that the UK’s vital services sector didn’t contract last month, instead it only stalled. Although stagnation isn’t positive, the better-than-expected results seem to be offering Sterling some support.
Euro (EUR) Subdued following Contractionary PMI
The Euro (EUR) found itself under some pressure this morning after the Eurozone’s final services PMI confirmed a contraction in September.
The PMI survey printed at 48.8, slightly below the preliminary reading of 48.9 and down from 49.8 the previous month. Any score below 50 signifies a decline in activity, and today’s reading confirms a deepening contraction in the Eurozone’s services sector.
In addition, the Euro’s negative correlation to a strengthening US Dollar (USD) also created some headwinds for the currency. A souring market mood buoyed the safe-haven Dollar, which in turn weighed on EUR.
Pound Euro Exchange Rate Forecast: More Fluctuations Ahead?
As the session unfolds, the Pound Euro exchange rate may be driven by news from Ukraine and domestic UK headlines around the fallout of the government’s mini-budget.
Today is the final day of the Conservative Party Conference, which has so far highlighted deep divisions among MPs. We could see some volatility in Sterling today, particularly if senior Tory figures reveal anything new about the government’s economic and fiscal plans.
Meanwhile, any updates from the Russia-Ukraine war could impact EUR. If Ukraine continues to make rapid progress, the single currency could strengthen amid hopes of a swifter-than-expected end to the war. However, following the Russian annexation of four Ukrainian territories, there is a chance that the Kremlin may escalate the conflict. Any sign that Vladimir Putin is planning to ramp up his invasion could weigh on the Euro.