EURGBP: EUR to GBP calm as UK economic downturn starts to ease
The EUR to GBP (EURGBP) pair held gains after positive data from the UK and the eurozone. The market is also reacting to the testimony by Andrew Bailey, the Bank of England (BOE) governor.
UK manufacturing activity improves
Data from Markit showed that business activity improved in May but remained in contraction territory. The manufacturing PMI improved to 40.6 from the previous 32.6. The sector has been in contraction territory since March this year.
The activity improved in May as more businesses reopened their business after started to reopen following the government-announced curfew.
The important service sector also improved. The services sector is particularly important because it employs more than 80% of the total workforce. The PMI doubled from the previous 13.4 to 27.8. However, according to Markit, many subsectors like hotels, restaurants, and tourism continued to suffer.
The data came a day after Andrew Bailey said that the bank would consider negative interest rates in the upcoming meetings, which moved the EUR to GBP further higher.
Eurozone PMI improves
The EURGBP pair also reacted to the positive manufacturing and services PMI data from the eurozone. The manufacturing PMI in the region increased to 39.5 this month. This was a significant increase from the previous 33.4. At the same time, the services PMI improved from the record low of 12.0 to 28.7.
As with the UK, Markit lamented that several areas of the services sector were still ailing. This is important because countries like Italy and Spain are built around the tourism sector. Chris Williamson of Markit said:
“Second quarter GDP is still likely to fall at an unprecedented rate, down by around 10% compared to the first quarter, but the rise in the PMI adds to expectations that the downturn should continue to moderate as lockdown restrictions are further lifted heading into the summer.”
In total, the composite PMI improved from the previous 13.6 to 30.5, which is positive for the EUR to GBP.
The EUR to GBP pair is trading at 0.8975, which is closer to the highest level since March 27. On the four-hour chart, the pair has formed a trough as shown below. Also, the price is slightly above the 50% Fibonacci Retracement level. It is also slightly above the 50-day and 100-day exponential moving averages. This implies that the upward trend will continue as investors attempt to retest the 38.2% Fib level at 0.9037.
On the flip side, a move by EURGBP below 0.8900 will invalidate this prediction. This price is an important psychological level and is along the 50-day EMA and the 50% Fib level.