Pound Euro (GBP/EUR) Exchange Rate Plunges as PMIs Spark Recession Fears
(Updated 14:45, 23/08/23) The Pound Euro (GBP/EUR) exchange rate briefly hit a one-year high this morning before slumping to a one-week low after UK business activity unexpectedly contracted in August.
The volatility came in the wake of the latest PMI surveys.
The British manufacturing sector faced a bigger-than-forecast contraction this month, with activity shrinking at its fastest pace since the Covid pandemic hit in 2020.
More worryingly, the UK’s vital services sector unexpectedly shrank – only the second contraction over the last 31 months.
The data has revived UK recession fears, while also dampening Bank of England (BoE) interest rate hike bets.
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, which co-published the survey, said:
‘The early PMI survey for August suggests that inflation should moderate further in the months ahead, but also indicates that the fight against inflation is carrying a heavy cost in terms of heightened recession risks.
‘A renewed contraction of the economy already looks inevitable, as an increasingly severe manufacturing downturn is accompanied by a further faltering of the service sector’s spring revival. The survey is indicative of GDP declining by 0.2% over the third quarter so far.’
The UK economy has entered a significant downturn, according to August flash #PMI surveys. Barring pandemic lockdown months, this is one of the steepest contractions since the global financial crisis. The surveys signal #GDP set to fall by 0.2% in Q2 with worse likely to come. pic.twitter.com/w44sLvItT4
— Chris Williamson (@WilliamsonChris) August 23, 2023
At the time of writing, the Pound Euro exchange rate is trading at €1.1690, down 0.4% on the day and almost a cent lower than an earlier one-year high of €1.1774.
Original article continues below:
Pound Euro (GBP/EUR) Exchange Rate Slumps after Dire UK PMIs
The Pound Euro (GBP/EUR) exchange rate spiked to a one-year high this morning before suddenly slumping as the latest PMI surveys infused the currency pairing with volatility.
At the time of writing, GBP/EUR is trading at around €1.1712, down around 0.2% on the day. Earlier it briefly touched a one-year high of €1.1774.
Euro (EUR) Drops as PMIs Disappoint
The Euro (EUR) initially slumped this morning after new data revealed that Eurozone private sector activity fell to its lowest level since November 2020 this month.
August’s preliminary PMI results, which gauge the health of the bloc’s manufacturing and services sectors, showed that private sector activity contracted at its steepest pace in almost three years.
The manufacturing PMI printed slightly above expectations, though it remained worryingly deep in contractionary territory at 43.7. Meanwhile, the services PMI missed forecasts, falling from 50.9 to 48.3, rather than the expected 50.5.
A score of 50 represents stalling activity. Above 50 indicates expansion, while below indicates contraction.
These troubling results saw EUR exchange rates slide.
Pound (GBP) Plunges on Renewed Recession Fears
However, the Pound (GBP) quickly relinquished its gains after the UK’s own PMI surveys printed even worse than the Eurozone’s.
Manufacturing fell from 45.3 to 42.5, versus the expected score of 45.
More worryingly, the UK’s service sector, which represents around 80% of British economic output, unexpectedly shrank. The services PMI score fell from 51.5 to 48.7, rather than the forecast 51.
Furthermore, the PMI contained evidence that inflation is moderating, potentially lessening the need for more interest rate hikes from the Bank of England (BoE).
With the latest data both raising recession fears and dampening BoE rate hike bets, Sterling is facing heavy selling pressure.
Pound Euro Exchange Rate Forecast: Sterling to Fall Further?
Looking ahead, the Pound may struggle to recoup its losses against the Euro today as the UK’s dire PMIs continue to dampen GBP demand.
One factor that could limit Sterling’s losses is the market mood, which is currently upbeat. This could favour the increasingly risk-sensitive Pound versus its safer European rival.
However, if the worrying PMI results from the UK and the Eurozone begin to weigh on market sentiment, a pullback in risk appetite could add to GBP/EUR’s losses.
Later in the afternoon, more Eurozone data is due out. The latest consumer confidence index is expected to show another rise, with household morale having improved almost every month since striking an all-time low in September. If consumer confidence did continue its recovery in August, the Euro could gain further ground against the Pound.