EUR GBP Slumps on Weak PMIs and Bank of England

EUR GBP Slumps on Weak PMIs and Bank of England

The EUR GBP exchange rate was lower on Thursday as weaker PMI data for the European and German economies signalled a slowdown in the economic rebound. The Bank of England also released their interest rate and monetary policy thoughts with the bank holding rates steady and warning of inflation above 4% this winter.

The EUR to GBP rate trades at 0.8540 and could move back towards the yearly lows near 0.8450.

PMI data signals economic slowdown in UK and Europe

The EUR v GBP slumped after the latest PMI data signalled a slowdown in the economies of the UK and Europe. For Europe and Germany, the figures missed forecasts by more than the UK did. Spanish GDP also disappointed in a final reading with the economy posting a 1.1% quarterly growth after 2.8% was expected.

The Spanish government had expected to see the economy back at pre-virus levels by year-end but may have to revise that projection.

For Germany, the flash composite PMI, which tracks the manufacturing and services sectors, dropped to a seven-month low of 55.3 from 60.0 in August. Germany’s economic recovery lost momentum in September as activity in both sectors slowed amid supply bottlenecks and slowing catch-up effects.

A similar number was seen for Europe with a drop from 59 to 56.1 in September. The UK’s PMI composite showed a milder dip from 54.8 in August to 54.1 this month. Manufacturing was affected by the supply chain issues with a larger drop, but the services sector is a much larger percentage of the UK economy.

Chris Williamson, IHS Markit’s chief economist, said: “While there are clear signs that demand is cooling since peaking in the second quarter, the survey also points to business activity being increasingly constrained by shortages of materials and labour, most notably in the manufacturing sector but also in some services firms.”

Bank of England warns of 4% inflation into 2022

The Bank of England held its main interest rate at the record low of 0.1% on Thursday but warned that inflation would be double its target rate by the end of this year, largely due to a sharp hike in energy prices.

The decision from the central bank’s Monetary Policy Committee was unanimous, however, two members voted to start reducing the bank’s stimulus program

In minutes for the committee’s latest meeting, the panel said dynamics over the last month had “strengthened” the case for some tightening of monetary policy in order to meet the central bank’s 2% inflation target in the medium term. However, it also noted that “considerable uncertainties remain.”

Further comments said:

“Since the August MPC meeting, the pace of recovery of global activity has showed signs of slowing.

“Against a backdrop of robust goods demand and continuing supply constraints, global inflationary pressures have remained strong and there are some signs that cost pressures may prove more persistent.”

The BoE also said it would be watching carefully as the furlough scheme was unwound at the end of September.