EURGBP Reacts to Upbeat UK PMIs

Ambivalence was the theme from the release of flash PMIs out of Europe, as measures miss and beat across different countries, but markets are still relatively  buoyant.

Counting Beats and Misses

Markets started the day somewhat upbeat despite the looming risk events later in the day, with less volume expected due to the US being away on holiday. The euro gained against a weakening dollar as markets seemed poised to take on risk as a continuation of the trend set during the Asian session. A few earnings reports exceeded expectations, contributing to the upward bias.

That momentum suffered initially with the first Flash PMI release from the Eurozone's second-largest economy, France, which suffered a reversal in its business activity due to weak demand for goods and services. Manufacturing PMI fell to 42.6 from 42.8 and below the expected improvement to 43.2. That was the eleventh consecutive month of contractions and the lowest reading for France since May 2020. HCOB said that it was the first time that employment in the private sector fell in three years. The services measure also disappointed at 45.3 compared to the 45.6 expected, the sixth consecutive month of decline.

Turning Things Around

Markets were able to return to their upward trajectory following the better-than-anticipated results from Germany. Flash November Manufacturing PMI came in at 42.3 compared to 41.1 to record the 17th month of contraction but the best reading since May. Services PMI was slightly above expectations at 48.7 vs 48.4 but scored two months of contraction. Analysts noted that higher output prices and wage growth will likely keep upward inflation pressure. Eurozone Flash PMIs were a mixture of the results from the two largest economies: A slight beat on the number, higher prices and falling unemployment, with the net result supporting concerns of a potential recession. Eurozone Flash November Manufacturing PMI beat slightly at 43.8 compared to 43.3 expected, though it was the highest since May. Services scored a fourth consecutive month of contraction but improved to 48.2 v 48 expected.

The pound was under pressure following the release of Chancellor Jeremy Hunt's Autumn Statement, which didn't seem to wow investors as much as they hoped. But the PMI figures helped revert that after across-the-board substantial beats. Manufacturing PMI beat handily at 46.7 over 45.0 expected, but still in contraction for the 16th time in a row. Services, however, returned to expansion at 50.5 compared to 49.5 expected, bringing the composite back into expansion. Higher output prices pointed to inflationary pressures still entrenched, though analysts suggested that the latest results showed the UK's GDP could end up flat in the final quarter.

The EURGBP slid lower following the release of French data due to weakness in the euro but fell back with the improved German data. The sick man of Europe narrative remained intact, with the latest figures suggesting that the shared economy could slip into recession later this year while the UK still manages to hold on to flat growth.

EURGBP Still Biased Up

The formation of the EURGBP resembles an incomplete wedge pattern pending further upside above 0.8775 to put in the third peak. But if the bulls fail to get past 0.8686 (the post-event slump low), the pattern may be a running triangle instead. In such an event, the 0.87 support will likely hold by the close, with a breakdown forming a larger triangle or confirming a double top at 0.8767, suggesting deeper drops towards 0.8660.

Source: SpreadEx / EURGBP

Key Takeaways

The release of flash PMIs from Europe resulted in mixed reactions in markets as France's poor PMI was offset mainly by Germany's, providing some relief. The Eurozone's PMIs were a mix of results from the two largest economies, showing slight improvement but still raising concerns about a potential recession. However, the UK's upbeat PMIs saw a larger market reaction, strengthening the British pound, but traders still await directionality.