PMI print emphasises disparity between UK and EU economies, attention turns to US GDP release
Yesterdays PMI data signified the distinction between UK and Eurozone economies. In light of this, I thought a brief update would be useful.
The UK economic downturn is still underway whereas the Eurozone appears to have turned a corner, as emphasized by the start of week economic data, developments that are tipped by currency analysts to weigh on the GBP/EUR rate.
The GBP fell against its continental peer after the PMI survey data for January revealed a noticeable divergence in performance between the UK and Eurozone economies and investors accordingly reassessed their expectations for the path of interest rates.
According to analysts from UBS "The UK faces slightly stiffer economic challenges currently than the Eurozone" and the performance for GBP and EUR over the coming months will heavily rely on how the BoE and ECB navigate their interest rate hiking cycle.
The EU composite PMI exited contraction territory in January after reading at 50.2 from 49.3 in December, beating expectations for 49.8. This is infact the highest reading since June and suggests that downside risks are receding. Contrastly, the UK composite PMI read at 47.8, down on December's 49 and below analyst forecasts for 49.1 - showing more contraction in the UK manufacturing and services industries.
Januarys flash PMIs suggest that UK GDP still is on a downward trend, as real incomes continue to fall in response to a pullback in government grants in Q1, increases in interest rates, and the commencement of job cuts.
GBP/EUR slipped to 1.1314 in the wake of the figures and short-term momentum suggests a test of January lows at 1.1250 cannot be discounted over the coming days.
GBP/USD is holding steady above 1.2300 heading into early morning trade on Wednesday around London open. The USD has been licking its wounds amid broad risk aversion in the markets and muted US Treasury yields, lending some support to the GBP/USD pair.
Downbeat prints of both the UK and the US activity data for January failed to provide any clear directions for the Cable pair traders. It is worth noting, however, that the various stimulus and energy payments have led towards the UKs record deficit but couldn’t solve the workers problem in Britain, both of which signals more negatives for the GBP/USD pair.
On the other hand, US recession woes are on the table and hence the US Dollar trades dicey ahead of the US Gross Domestic Product (GDP) for the fourth quarter (Q4) and the next week’s Federal Open Market Committee (FOMC) meeting.
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