Economic Update

GBP

The Purchasing Managers Indices were released across the board last week. In the UK, markets expected a slight improvement from the Services data, which was anticipated to come in at 53.2 (above the critical level of 50). However, the data revealed a stronger upturn in private sector output than expected, landing at 53.8. The UK’s Manufacturing PMI is still lagging below the 50 threshold but came in above the anticipated 46.7 at 47.3.

As a result, the Flash UK PMI Composite Output Index (which combines Manufacturing and Services) reached a seven-month high of 52.5, up from 52.1 in December. GBP saw some strength against the dollar in the immediate aftermath before pulling back following the release of solid PMIs in the US.

GBP/EUR, on the other hand, reached a 2024 high of 1.1735 last week, a four-month high and in line with levels not seen since September 2023.  

The Bank of England will hold its first monetary policy meeting of the year on Thursday 1st February. Markets are expecting the central bank will hold interest rates as they are, with only a 5% probability of seeing a rate cut. However, there will still be significant interest in any commentary and forecasts released by the BoE, particularly after the unexpected uptick in inflation reported earlier this month.

EUR 

Last week also saw PMI data released across Europe. Markets expected very gentle improvements in France and Germany's manufacturing and services sectors. In reality, although both countries’ Manufacturing PMIs increased more than expected, with Germany’s figure landing at 45.4, above the expected 43.7, and France’s at 43.2, ahead of 42.5, both Services PMIs were lower than anticipated. Germany’s Service PMI dropped to 47.6 from 49.3 in December (which was also expected this month), while France’s came in at 45.0, below the anticipated 46.1 and the 45.7 measured in December.

Despite the Manufacturing PMI data improvements, the figures remain below the key 50 threshold, indicating contraction in the industries.

On Thursday, the European Central Bank met to decide on EU interest rates and unsurprisingly kept its key target rate steady at 4.0%. The statements following the meeting from the ECB were dovish, suggesting that an interest rate cut is being lined up and weakening the EUR, which sunk to six-week lows following the decision.

Now, the focus for EUR markets will shift to the next meetings in March, April and June, with many analysts suggesting the question now is not if they will cut interest rates, but when. To add to the speculation, Reuters reported that anonymous policymakers said they were open to a change in rhetoric at the next meeting and a possible rate cut in June if Europe was further along the disinflation process after the meeting.

According to Bloomberg analysis, the probability of a 0.25% rate cut in March sits at a low of 20.2%, 70.8% in April, and an almost conclusive chance of at least a 0.25% cut in June. These probabilities, taken in the context of much of the commentary we are seeing from banks and analysts, suggest that an ECB interest rate cut in June is priced in. Any cuts earlier than that will be at least a little bit surprising for the market.

This week will be all about growth and inflation data in the European Union. On Tuesday and Wednesday, a host of Eurozone countries, including France, Spain, Italy and Germany, are scheduled to release their GDP growth and CPI inflation data.

These data points will feed heavily into the questions around when the European Central Bank will be cutting interest rates, with most bets currently on the June meeting. However, if we see stronger-than-expected growth throughout Europe or inflation stays the same or moves higher, this could lead to any interest rate cut being pushed back. Conversely, if economic growth in Europe is dropping or inflation drops significantly, then that could increase the chances of an earlier rate cut.