Pound-Euro Bid as UK PMI Data Outshine those of the Eurozone

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The UK economy continued to grow in June with PMI survey data coming in stronger than expected while revealing strong wage pressures at firms that were increasingly willing to pass on price increases to customers, which should maintain pressure on the Bank of England to raise interest rates.

Pound Sterling was bid against the Euro after S&P Global's Flash Services PMI read at 53.4 in June, which was stronger than the 52.9 the market was looking for and unchanged on May's 53.4.

The flash PMI for UK manufacturing read at 53.4 in June, softer than the 53.6 the market was looking for and softer than the previous month's 54.6.

The Composite PMI - which balances the data set to give a better snapshot of the broader economy - read at 53.1, unchanged on May and better than the consensus was looking for at 51.8.

"The fact that the composite PMI didn’t fall in June means the economy could be holding up a little better than we and the Bank of England had feared," says Nicholas Farr, Assistant Economist, at Capital Economics.

May's PMI release showed a sharp deterioration and shocked the Pound lower and by the same token the steady June performance will therefore settle nerves.

It is notable that the Eurozone PMI data shocked to the downside in June, as per data released half an hour ahead of the UK.

The data suggests therefore that the Eurozone's slowdown is about a month behind that of the UK.

The Pound to Euro exchange rate (GBP/EUR) did lift into the green on the contrasting fortunes of the UK and Eurozone signalled in the numbers.

GBP/EUR one to 1.1613, having been as low as 1.1570 in the lead up to the PMI release.

Above: GBP/EUR at five minute intervals showing the upside move following the June UK PMI release.

Commenting on the data, S&P Global said it indicated output growth across the UK private sector was unchanged from the 15-month low seen in May.

"Resilient business activity trends were seen across the service economy as a whole," said a statement accompanying the release.

It was found that demand conditions remained subdued in June, with new order growth at UK businesses slowing for the fourth month running and to a greater extent than seen during May.

The report added worries about customer spending cutbacks and the impact of rapid inflation on the longer-term economic outlook led to another fall in business activity expectations.

The outlook for UK businesses remains challenging with the survey finding UK private sector firms cited hesitancy among clients and squeezed budgets due to rising inflation as key factors holding back demand.

New order volumes across the UK private sector as a whole dropped from 53.8 in May to 50.8 in June.

Above: UK Composite PMI series from S&P Global.

Nevertheless, the jobs market remains robust and signals an outright recession is not a forgone conclusion.

"Despite weaker new business growth, the latest survey signalled a robust and accelerated rise in staffing numbers," said S&P 500.

In fact, job creation was the fastest for three months, led by stronger hiring in the service sector.

The survey revealed strong wage pressures added to cost burdens at private sector companies in June.

This will maintain pressure on the Bank of England to continue raising interest rates in order to keep a lid on rising inflation.

"Taken together with signs that economic activity is slowing rather than sinking, we think that the PMI survey bolsters the case for the Bank of England to deliver further interest rate hikes over the coming months," says Farr.

Signs of ongoing wage pressures are a classic indicator inflation is becoming domestically embedded and will allow further hikes from the Bank of England to be delivered.

Indeed, exceptionally strong cost pressures resulted in a steep increase in average prices charged in June said S&P Global.