EUR/GBP edges lower after eurozone business activity contracts

Eurozone PMIs contract again

Business activity in the eurozone contracted for a second straight month in August. While the cost of living crises meant consumers reined in their spending, supply chain issues also hurt manufacturing.

The composite PMI, often considered a good gauge of business activity, was 49.2, down from 49.9. The level 50 separates expansion from contraction.

The outlook for the eurozone is growing darker by the day with the economy more likely to enter recession than not. Soaring energy costs have lifted inflation to a record high and there are no signs of price rises slowing anytime soon.

In fact, quite the opposite. Should Russia continue to play with gas supply to Europe heading into winter, the consequences are likely to be severe.

With problems mounting in the eurozone the euro has fallen steeply, most notably against the USD as the pair trades below parity at a 2-decade low. Given the growing divergence in the outlook for the eurozone compared to the USA, a significant recovery in the euro looks unlikely for now.

UK business activity is almost stalling

In the UK business activity still grew in August, although is in danger of stalling. The service sector booked growth, with the PMI at 52.5, above forecasts. However, the manufacturing sector slumped to 46 in August, down from 52.1 in July, marking its lowest level since May 2020 in the depths of the pandemic.

With inflation at a 40-year high, it only seems to be a matter of time until the services PMI slips below 50, as consumers look to rein in spending. Furthermore, tightness in the labour market is likely to keep staffing costs elevated.

The BoE has warned that the UK will likely fall into recession towards the end of the year. The contraction is expected to last until 2024.

Following the data release, the FTSE 250, the more domestically focused index fell to a monthly low. The pound continues to hover around 2022 lows against the USD. However, EUR/GBP is grinding lower as the UK economy modestly outperforms the eurozone.

Where next for EUR/GBP?

EUR/GBP trades within a triangle formation. After running into resistance on the falling trendline resistance the price found support today on the 20 sma at 0.8425. The RSI is giving few clues at neutral.

A breakout trade here would see buyers looking for a move over 0.85 the falling trend line resistance and the 50 sma. A move above here could see 0.8585 the July 21 high come into play.

Sellers could look for a break below 0.8370 the rising trend line support to bring 0.8330 the August low into focus.

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