EUR/GBP rises half a percent, more due to GBP weakness than EUR strength

• EUR/GBP recovers to the 50-day SMA in the mid-0.8300 zone.
• The Pound is depreciating due to doubts about the strength of the UK economy.
• The Euro is also in trouble, however, after another set of bad numbers from Germany.

EUR/GBP is trading back to the 50-day SMA level around 0.8350 on Monday, but more as a result of British Pound (GBP) weakness than Euro strength.

The pair is back within its medium-term range between approximately 0.8300 and 0.8450, as downside risks put pressure on both currencies, resulting in a lack of overall volatility and a range-bound market structure. That said, the pair is at more than two-year lows, suggesting the possibility that the Euro is undervalued and, perhaps, due for a bounce.

However, the German IFO Business Climate survey published on Monday was not going to provide a catalyst for such a rebound. Based on more than 9,000 responses in key sectors such as manufacturing, services, construction and commerce, showed a continuation of the theme of the German economy stuck in a phase of decline.

The IFO Current Assessment index fell to 84.3 in November from 85.7 in October and below the forecast of 85.4. It was a similar story with the Business Climate index, which also fell from the previous month and below expectations. Meanwhile, the Expectations index came out at 87.2, above the forecast of 87.0 but below the previous 87.3. Overall, the data painted a negative picture of Europe’s largest economy.

IFO President Clemens Fuest noted that “The German economy is faltering. Businesses were again somewhat skeptical about the coming months.”

The data follows weak Purchasing Managers’ Index (PMI) survey data for both the Eurozone and Germany on Friday, which showed the German composite PMI plummeted to a nine-month low of 47.3 in October.

“Germany remains the weak link in the Eurozone,” said Dr. Win Thin, Global Head of Market Strategy at Brown Brothers Harriman (BBH) in a note on the data releases. Given Germany’s importance as the “engine” of the Eurozone economy, the comment is worrying.

However, the Single Currency continues to see gains against the Pound on Monday. This non-intuitive reaction could be explained by the fact that the Pound is the weaker of the two, but the Euro is not particularly strong either.

The GBP drop could be due to the series of bad UK data releases recently. These have led investors to re-evaluate the future path of interest rates in the UK. This is key for the Pound, as higher interest rates attract more foreign capital inflows, supporting the currency, while lower rates do the opposite and weaken the GBP.

Previously, the perception had been that in the UK interest rates would remain at a relatively high 4.75% while in many other developed economies they would begin to fall rapidly. This was mainly due to the UK economy’s high wages, high inflation in the services sector, robust labor market and relatively positive outlook for growth.

The release of UK unemployment data for September, which showed the unemployment rate surprisingly rising to 4.3% from 4.0% previously, suggested the true picture may be less flattering.

However, it was the release of preliminary UK PMI data for November on Friday that really started to cast doubt. The UK Composite PMI came out much lower than expected and surprisingly fell into contraction territory below 50.

This poor PMI data resulted in market-based projections of the lowest point for UK interest rates being revised downwards from 4.00% to 3.75%.

“Looking at the November composite PMIs, Australia fell below 50 to 49.4, Japan remained below 50 but improved slightly to 49.8, and the Eurozone fell below 50 to 48.1. However, the biggest surprise came from the United Kingdom. United, as his composite plummeted to 49.9 and he joined the ranks of the under-50s,” says BBH’s Thin.

That said, despite the weak data and the fact that swap markets are pricing in a lower terminal interest rate, officials at the Bank of England (BoE) – who are tasked with adjusting interest rates – are not They seem to have radically changed their position.

More poor data may be needed before they are ready to reevaluate their “gradualist” position. This was summed up by comments from BoE Deputy Governor Clare Lombardelli on Monday, who said, “We shouldn’t focus too much on one set of data (referring to last week’s weak PMI data).”

Rather, “We remain more focused on service prices and wages…(…)..The labor market remains relatively tight,” and that “I see the probabilities of downside and upside risks to inflation as broadly balanced. But at this point I am more concerned about the possible consequences if the rise materializes, as this could require a more costly monetary policy response.”