Both the Euro and GBP have fallen today following disappointing business activity (PMI) figures out this morning from the Eurozone and UK.
Data showed that activity slumped across the board this month in the Euro Area, with the composite PMI index coming in well short of the estimate and to the lowest levels seen since January (48.1 vs. 50 estimate). Businesses across Europe seem to be acutely concerned about the risks posed by president-elect Trump’s radical tariff proposals. This could weigh particularly heavily on the common bloc’s economy in the next few years, given that it relies on US demand for around 4% of its GDP. Consequently, this data is likely to ramp up pressure on the ECB to deliver more aggressive interest rate cuts in the coming months to support the bloc’s economy. This could easily entail a jumbo 0.5% rate cut at next month’s ECB interest rate meeting. This is now roughly 60% priced in by markets, a repricing that has triggered a collapse in EUR/USD rate today.
Although not quite as dismal as the Euro Areas figures, the UK PMIs were underwhelming, to say the least. The composite index slumped into contraction this month (49.9) for the first time since October 2023, which was well below the estimate of economists (51.8). This is likely a direct consequence of the recent Autumn Budget announcement, with the large hikes to employer National Insurance contributions seen squeezing company profits, while triggering job losses and raising consumer prices. The data has led to Sterling weakness today as markets race to price in an additional rate cut from the Bank of England, which is now seen delivering three 0.25% cuts over the next twelve months (up from just two prior to this data).
As a result, the EUR/USD rate has fallen 1.4% from yesterday’s high and trades around a 2-year low. The GBP/USD is down around 1% from yesterday’s high and now trades around the lowest levels since May this year. The GBP/EUR has been trading within a very tight range around the market rate of 1.20.
Traders’ attention will now focus on this afternoon’s US PMI numbers, which take on added intrigue following the dire figures out of Europe this morning. Consensus is for a very strong print in the key services index around the 55 level, which would be consistent with strong expansion. Any number around this mark would ramp up expectations that a Trump presidency could mean a further divergence in economic performance across the Atlantic, which would only provide fresh fuel to the USD rally.
