Pound and euro fall against dollar as economic data warns of recession

PMI data from the UK and Eurozone failed to cheer investors on Wednesday

Close-up of international bank notes and coins; Pounds, Euros and Dollar. The pound and euro fell against the US dollar on Wednesday. Photo: Getty
The pound and euro fell against the US dollar on Wednesday. Photo: Getty

The pound and euro fell against the US dollar (USD) on Wednesday on the back of disappointing economic data that points to a possible recession over the remainder of the year.

The pound (GBPUSD=X) fell 0.38% against the dollar to $1.26, while the euro (EURUSD=X) also declined against the dollar, by 0.06% to $1.08.

It comes as UK PMI data released on Wednesday showed a sharp fall in private sector output.

“The UK readings were particularly stark, with both the services and manufacturing PMIs falling well short of forecasts and the former deep into contraction territory,” Craig Erlam, senior market analyst at OANDA, said.

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Weakness was widespread from new orders to hiring, "which suggests we're not just talking about a blip in the data, but rather the prospect of a recession in the second half of the year,” he added.

Meanwhile, Eurozone figures also failed to cheer investors prompting the euro to collapse to almost two-month lows on the USD.

“Today’s underwhelming Euro Area (Eurozone) PMI data raises doubts over the possibility of additional ECB interest rates hikes,” Matthew Ryan, head of market strategy at financial services firm Ebury, said.

“Core inflationary pressures remain elevated, tighter monetary conditions are squeezing household spending power and soft Chinese demand looks set to dampen export revenue.

“For now, we continue to expect one final interest rate increase from the European Central Bank at either its September or November meetings, although the weak growth environment suggests that an end to hikes isn’t too far away. This could present a downside risk to our otherwise bullish view on EUR/USD.”

The Bank of England is also likely to hike interest rates further before year-end, although, we may begin to see a more vocal dovish dissent among the committee, as policymakers balance high core inflation with an economy verging on stagnation, according to Ryan.

However, Martin Beck, chief economic advisor to the EY ITEM Club said in a note to clients that the combination of a slowdown in both activity and inflation suggests a rate increase is no longer a certainty.

Read more: UK recession fears rise after sharp fall in private sector output

“On balance, the EY ITEM Club thinks the latest survey findings may not be enough to deter the Bank of England from raising interest rates again, given recent developments in pay and services inflation,” he said.

“But they do reinforce the EY ITEM Club’s expectation that a rate rise next month, if it happens, will likely be the last in the current cycle.”

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