Pound shows resilience amid economic hurdles; Euro zone struggles further

The British pound exhibited its resilience on Tuesday, defying adverse economic indicators. Despite sluggish performance in the UK’s labour market and dwindling business activity, the pound managed to inch higher against the euro. Meanwhile, the euro zone faced a more grim economic survey.

Amidst the UK’s economic data, the unemployment rate held steady at 4.2%, albeit using a new calculation method accounting for the decreasing household survey responses. However, a concerning trend emerged as the number of employed individuals fell by 82,000, while the number of unemployed individuals rose by 74,000.

In currency markets, sterling managed to claw back 0.24% against the euro, with the EUR/GBP pair trading at 86.90 pence. The pound remained steadfast against the US dollar, with the GBP/USD pair flatlining at $1.2247.

Further exacerbating concerns, a separate survey revealed that UK businesses reported yet another decline in activity during the current month. Additionally, cost pressures appeared to ease, further highlighting the looming recession risk. These dire statistics arrive just ahead of the Bank of England’s interest rate decision scheduled for next week.

A preliminary reading of the S&P Global UK Purchasing Managers’ Index (PMI) for the services sector painted a gloomy picture. The October reading, registering at 49.2, dropped from 49.3 in September, marking the lowest point since January. Notably, this figure fell below the critical 50-point threshold, indicating a third consecutive month of contraction, contrary to economists’ expectations of an unchanged reading.

The euro zone encountered an even more disheartening PMI report, signalling a downturn in business activity within the bloc.

Market dynamics have also shifted, with traders now suggesting that UK interest rates may have reached their peak at 5.25%. This comes in stark contrast to the sentiment just three months ago when market participants were bracing for a peak of 5.8% by May 2024, with the possibility of the first rate cut by September.

The current scenario can be attributed to a decline in inflation from 7.9% to 6.7%, coupled with stagnant year-on-year growth. Neil Birrell, Chief Investment Officer at Premier Miton, aptly summed up the situation, noting, “It’s hard to believe that sticky inflation and higher interest rates won’t have more impact on the surprisingly robust economy. Focus is now all on the upcoming round of central bank policy decisions.”