- Pound (GBP) falls in risk-off trade
- UK manufacturers are more pessimistic about the outlook
- Euro (EUR) rises despite cooling inflation
- The ECB is expected to cut rates again in October
The Pound Euro (GBP/EUR) exchange rate is falling on Tuesday after yesterday’s gains. The pair rose +0.23% on Monday, settling at €1.2007 and trading in a range between €1.1996 and €1.2032. Today, at 16:15, GBP/EUR trades -0.18% at €1.1994.
The pound is falling amid risk-off trade in the markets and as concerns over the upcoming UK budget weigh on manufacturing activity. British manufacturing turned more pessimistic in September amid concerns surrounding the Labour Party’s first budget and the conflict in the Middle East.
The S&P Global UK manufacturing PMI edged down to 51.5, in line with the preliminary reading in September, down from a 2-year high of 52.5 in August.
Meanwhile, the PMI, a measure of business optimism for the coming year, fell to a 9-month-low, highlighting uncertainty about the government’s direction and the autumn budget.
PM Kier Starmer and the chancellor of the exchequer Rachel Reeves have warned of the need for higher taxes in this budget, having spoken extensively about the desperate state of the economy they inherited.
The euro is rising against the pound but falling against the US dollar after data showed that eurozone inflation cooled further in September. Inflation, as measured by the consumer price index, is 1.8% year on year, down from 2.2% previously. This was below the 1.9% forecast and marks the first time that inflation has fallen below the ECB’s 2% target rate in three years.
The data supports the view that the ECB will cut interest rates by 25 basis points further this month, marking the third cut since it started reducing rates in June.
A 25 basis point cut in October would bring the rate to 3.25%, and investors are pricing in a reduction in borrowing costs of about 1.8% by the end of next year.
Meanwhile, data showed that the downturn in the eurozone manufacturing sector deepened last month, with activity contracting at its sharpest pace this year. The manufacturing PMI fell to 45 in September, marking the 27th straight month below 50, the level that separates expansion from contraction.