Not a great week for the pound – Sterling Update

Here’s the latest currency news from our partner Moneycorp, to help you find out what your money is worth.

GBP

It has not been a great week for the pound, with GBP/USD losing around 1.5% from the high, before stabilising somewhat near a two-month low of 1.2560. Similarly, GBP/EUR moved swiftly back under 1.1700, having previously topped a one month high. Incoming data has been a key driver to sterling weakness, with the latest PMI surveys further questioning the economic outlook and highlighting an increasing probability that Q3 will end with a shrinking UK economy. Yuck. The composite PMI collapsed from 50.8 in July, to 47.9 in August on a preliminary basis, marking the lowest reading for the survey since the January 2021 COVID lockdown period.

The slowdown mirrors the reduction in output during Q3 2022, at a time when many businesses reverted to decreased activity to mark the Queen’s funeral. S&P Global Market Intelligence now think that GDP in Q3 will decline by around 0.2%, highlighting that the ‘fight against inflation is carrying a heavy cost in terms of heightened recession risks.’

With services PMI slipping to 51 from 52.3 and manufacturing declining from 49 to 47, higher interest rates are clearly impacting all facets of UK output. The news will undoubtedly put further pressure on the BoE to pause the current cycle of rate hikes, especially given big slowdowns in interest rate-sensitive industries and the property market. That could then put further pressure on the pound, as traders price in the reduced probability of further BoE hikes, especially given the tentative signs of lower core inflation over the past two months.

On a brighter note, the latest data confirmed that Public Sector Net Borrowing hit £4.3bn during July, well down from the £6bn forecast by the OBR and was clearly aided by a big increase in tax receipts, which the OBR referred to as ‘strong.’ That has led to calls for tax cuts, although the government appear to retain a more cautious strategy, at least for the time being.

With a quiet schedule on UK data next week, the pound is likely to take its lead from the broader moves in the dollar.

EUR

Much the same as in the UK, incoming PMI surveys paint a rather dismal economic outlook throughout Europe. If you were in the glass half full brigade, you could perhaps point to an improvement among German and Regional manufacturing PMI, with the former rising from 38.8 to 39.1 during August (PRELIM), and the latter rising from 42.7 to 43.7 over the same period, albeit with both rising from a low base, and well below the 50 (expansionary/contractionary) threshold.

However, team glass half empty still have a much bigger advantage, given the already low levels of manufacturing output, which looks worryingly to be morphing into the services sector. Take Germany for example, and whilst we might all think of Germany as Europe’s big factory, nearly 70% of German GDP* is generated from the services sector, so the sudden slowdown really matters.

*As of 2022. Data supplied by Statista

Both German and Regional services PMIs slipped below 50 during the latest surveys, with the former moving from 52.3 to 47.3, and the latter from 50.9 to 48.3.  Of course, this will put the ECB into a tight corner, as they decide on whether they have enough wriggle room to squeeze another hike out of the bottle at their September meeting. Markets currently expect a less than 50% probability of a further rate hike before the end of this year. That probably tells you much. ECB president Lagarde will be speaking at the Jackson Hole symposium later today (Friday), during which she may give more clues as to the ECB’s next move.

Looking into next week, we are set to get key inflation updates throughout the region, and any clear signs of moderation in inflation will clearly take some of the pressure away from the ECB. Further evidence of current consumer sentiment is likely to come from the latest Retail Sales data.

As for the single currency, EUR/USD has declined for 6 straight weeks now from a high of above 1.1200, to a low at under 1.0800. For the single currency to stabilise, aside from signs of any economic recovery, markets will also need to witness broadly positive risk sentiment.