EUR/GBP recovers strongly from 0.8500 as UK S&P PMI deteriorates

• EUR/GBP delivers a V-shape recovery as UK factory activities remain vulnerable in August.
• UK’s Manufacturing PMI dropped significantly to 42.5 from estimates of 45.0 and the prior release of 45.3.
• Eurozone Services PMI fails to maintain above the 50.0 thresholds and slips into the contracting territory.

The EUR/GBP pair recovers strongly after discovering stellar buying interest near the psychological support of 0.8500 in the European session. The asset strengthened after S&P Global reported weaker-than-anticipated United Kingdom PMI data for August.

UK’s Manufacturing PMI dropped significantly to 42.5 from estimates of 45.0 and the prior release of 45.3. This has been the lowest factory data figure since the pandemic period, which demonstrates the consequences of higher interest rates by the Bank of England (BoE). The current tightening cycle of the BoE is the most aggressive in history and has dampened the economic outlook.

Additionally, Services PMI has shifted into the contraction phase below the 50.0 threshold. The economic data landed at 48.7 lower than estimates of 50.8 and July’s reading of 51.3. Vulnerable UK economic data indicates that the economy is expected to report recession sooner amid painful stubborn inflation.

On Tuesday, BoE policymakers warned about significant upside risks to corporate defaults amid higher interest rates. A survey from the BoE shows that the share of non-financial UK companies experiencing a weak debt-service coverage ratio will rise to 50% by year-end from last year’s reading of 45%.

Meanwhile, UK interest rate swaps demonstrate less than 50% chance of BoE’s interest rates reaching 6%. BoE’s interest rate peak is now seen at 5.90% vs. 6.06% projected earlier.

On the Eurozone front, the preliminary Manufacturing PMI for August outperformed expectations of 42.6, and the prior reading of 42.7, landed at 43.7. However, the Services PMI remained lower at 48.3 than estimates of 50.5 and the former release of 50.9. Eurozone Services PMI fails to maintain above the 50.0 thresholds and slips into the contracting territory.