Pound to Euro: "We're Sticking to Forecasts of Weaker Pound" say MUFG

November 24, 2023 - Written by David Woodsmith

STORY LINK Pound to Euro: "We're Sticking to Forecasts of Weaker Pound" say MUFG

GBP/EUR Exchange Rate Posts 2-Week Highs as UK Services-Sector Returns to Growth

Overall business confidence data from the Euro-Zone and UK were close to expectations, but a return to expansion territory for the UK services sector and on-going concerns over Euro-Zone recession combined to underpin the Pound.

The Pound to Euro (GBP/EUR) exchange rate spiked to 2-week highs at 1.1515 before settling around 1.1500.

The German PMI manufacturing index edged higher to 42.3 for November from 40.8 previously and above consensus forecasts of 41.2.

The services-sector index also improved to 48.7 from 48.2 and slightly above expectations, but still in contraction territory.

There was a similar picture across the Euro-Zone as a whole with the manufacturing index at 43.8 from 43.1 with the services index at 48.2 from 47.8 in October.

The manufacturing sector has been in contraction since July 2022 while this was the fourth successive month of contraction within the services sector.

Overall employment declined for the first time in close to three years.

As far as inflation pressures are concerned, factory output prices were down for the seventh straight month as firms passed on cost savings to customers amid sharply falling demand, while services charge inflation intensified to a three-month high.

Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, commented; “The Eurozone economy is stuck in the mud. Over the last four to five months, the manufacturing and services sectors have both been experiencing a relatively constant contraction pace. Considering the flash PMI numbers for November in our nowcast model indicates the potential for a second consecutive quarter of shrinking GDP. This would align with the commonly accepted criterion for a technical recession.

According to ING; “The November PMI does not provide much evidence that eurozone GDP growth will turn positive in the fourth quarter, but the good news is that the downturn is not deepening. We’re currently likely in a very shallow technical recession.”

The UK PMI manufacturing index improved to 46.7 for November from 44.8 previously and above consensus forecasts of 45.0.

The services-sector index also increased to 50.5 from 49.5 which was above expectations of 49.5. This was the first return to expansion territory for the first time in four months.

According to the survey, the overall rate of output charge inflation was the strongest for four months, largely due to a robust and accelerated increase in the service economy.

Tim Moore, Economics Director at S&P Global Market Intelligence commented; “The UK economy found its feet again in November as the service sector arrested a three-month sequence of decline and manufacturers began to report less severe cutbacks to production schedules.

He added; “Relief at the pause in interest rate hikes and a clear slowdown in headline measures of inflation are helping to support business activity, although the latest survey data merely suggests broadly flat UK GDP in the final quarter of 2023.”

Investment banks have also been assessing the UK Autumn Statement.

According to ING; “The implications for sterling should – in general – be positive as the tax cuts suggest a better growth outlook and potentially stickier inflation. However, it felt like the move in GBP already happened into the announcement, and there was some “buy the rumour, sell the fact” effect causing a softening of the sterling momentum.”

MUFG noted a slight shift in interest rate pricing with around 60 basis points of rate cuts priced in by the end of 2024 compared with 88 and 85 basis points respectively for the Fed and ECB.

Despite a limited shift in rate expectations MUFG still expects that the Pound will struggle; “It highlights that the new policy announcements are unlikely to significantly alter the outlook for the UK economy in the year ahead although further fiscal easing appears likely in next year’s budget as well. As a result we are sticking to our forecasts for a weaker pound.”

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TAGS: Pound Euro Forecasts