Pound rises against euro as UK composite PMI hits a six-month high

The pound gained against the euro on Friday after British business activity showed further signs of improvement in December, suggesting the economy has avoided a recession for now, while euro zone data painted a gloomier picture.

The S&P Global/CIPS UK Composite Purchasing Managers' Index (PMI) - spanning services and manufacturing firms - rose to 51.7, according to December's preliminary reading, the highest in six months and up from November's final reading of 50.7.

Economists polled by Reuters had forecast a reading of 50.9.
 

In contrast, HCOB's preliminary composite PMI for the euro area fell to 47.0 from 47.6, confounding expectations in a Reuters poll for an uptick to 48.0 and marking its seventh month below the 50 level separating growth from contraction.

 

"The UK economy continues to chug along, outperforming an increasingly sluggish continental economy," said Robert Hoodless, co-head: FX & macro analysis-Europe & Americas at ITC Markets.
 

"Today's data points to the UK avoiding a recession but even more now depends on the already important services sector," Hoodless added.
 

The pound was last up 0.4% at 85.75 pence per euro , heading back towards its strongest level in three months of 85.495 pence per euro reached on Monday.
 

The pound also gained against the dollar, rising 0.2% to $1.2789, in a week where the Bank of England (BoE) signalled interest rates would remain high into 2024, while the U.S. Federal Reserve laid the foundations for interest rate cuts in the first quarter of next year.
 

Markets expect the BoE to start cutting interest rates from May, slightly later than the European Central Bank (ECB) or the Fed, which analysts say could support the pound.
 

"The combination of strong growth and elevated inflation pressures should see the Bank of England keep policy on hold well into 2024," said Nick Rees, FX market analyst at Monex Europe.
 

"In contrast ... the ECB seemingly faces an ugly trade-off based on today's data. Deliver a nasty recession that kills off inflation pressures, or live with elevated price growth in order to forestall economic damage as much as possible. Either way, we see this as a more positive backdrop for sterling than the euro over coming months."