EUR/GBP: Lower after UK Manufacturing data enters growth zone

EUR/GBP edges lower into the 0.8550s on Tuesday, on the back of strong UK Manufacturing data. The pair, however, remains plum in the middle of its long-term range stretching the length of 0.8500.  

The S&P Global/CIPS Manufacturing PMI final reading for March showed a revision to above the 50 level distinguishing growth from contraction, and beating the preliminary estimate of 49.9, according to data from S&P Global. It is the first time since 2022 that the gauge has risen above 50. 

In comparison Eurozone Manufacturing failed to move above the 50 level even though it also came out above preliminary estimates. HCOB Eurozone Manufacturing PMI rose to 46.1 in March, beating the flash estimate of 45.7.  

UK House Prices lower-than-expected despite rise in mortgages 

On Tuesday, data from the UK’s largest building society Nationwide showed UK house prices rose by 1.6% YoY in March, falling short of estimates of 2.4% but higher than February’s 1.2%. 

On a monthly basis prices fell 0.2% after rising 0.7% in February, and below estimates of 0.3%. 

Despite the fall in house prices, UK Mortgage Approvals rose by 60.332K, which was above the expected 56.500K and the previous figure, according to data from the Bank of England (BoE). 

Borrowing was mixed according to the BoE data, with Net Lending for Mortgages higher but UK Consumer Credit lower. Consumer credit fell to 1.378 billion GBP borrowed in February – below forecasts of 1.600 billion, and below the previous 1.770 billion figure. 

The Euro seemed unfazed, meanwhile, by the release of lower-than-expected German inflation data, which showed the Harmonized Index of Consumer Prices slowing to 2.3% YoY in March when 2.4% had been forecast, from 2.7% previously. 

Similar interest-rate outlook 

A broadly similar outlook for interest rate policy in the two jurisdictions – a major driver for FX markets – does little to change EUR/GBP’s habit over the last two months of seesawing between tepid gains and losses. 

According to comments from BoE Governor Andrew Bailey, market forecasts for three 0.25% reductions in 2024 are reasonable, given the BoE isn't observing significant inflationary pressures. Lower interest rates are negative for the Pound Sterling as they reduce foreign capital inflows. 

His statements fuel expectations for the BoE to implement interest rate cuts in June, consequently exerting downward pressure on the Pound Sterling (GBP).

The European Central Bank (ECB) is similarly expected to cut interest rates in June.  Over the Easter weekend ECB policymaker Robert Holzmann indicated that interest rate cuts in June are probable, but contingent upon the evolution of wage and price data. 

Additionally, ECB Governing Council member Yannis Stournaras said on Sunday that there could be a total of four (0.25%) interest rate cuts in 2024, amounting to a cumulative reduction of 100 basis points (bps) by the end of the year.