MUFG analysts note that EUR/GBP has drifted lower within a 0.8600–0.8800 range as the Pound (GBP) outperforms the Euro (EUR). The euro-zone faces weaker PMIs and rising stagflation risks, while stronger United Kingdom (UK) data and sticky inflation have markets pricing more BoE tightening. They see scope for several Monetary Policy Committee (MPC) members to vote for a hike, keeping EUR/GBP under pressure.

Pound supported by stronger UK data

"The initial negative impact of the energy price shock on the euro‑zone economy was evident in the latest PMI surveys for April. The surveys showed that business confidence fell sharply in the services sector, while holding up better among manufacturers. The euro‑zone services PMI declined by 2.8 points to 47.4 in April, whereas the manufacturing PMI rose by 0.6 points to 52.2."

"For the euro‑zone economy as a whole, the composite PMI dropped by 2.1 points to 48.6, marking its weakest level since November 2024. The index has now fallen by 3.3 points since February, prior to the Middle East conflict. Business confidence has deteriorated more quickly than during the previous energy price shock triggered by Russia’s invasion of Ukraine in early 2022 and is already at much weaker levels."

"The GBP has held up better than the EUR over the past week, placing modest downward pressure on EUR/GBP, although the pair has remained within a relatively tight 0.8600–0.8800 range since the conflict began. The GBP has been supported by further evidence that the UK economy started the year with more underlying momentum than previously expected, while the initial negative impact of the energy price shock has so far appeared limited."

"Stronger growth momentum has increased the risk of a hawkish policy update from the BoE this week. The UK rate market has moved to price back in more tightening from the BoE, and the uplift for UK yields has provided more support for the GBP. The 2-year government bond yield in the UK has increased by around 30bps from the recent low compared to around 20bps in the euro-zone and just over 10bps in the US."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)