EUR/USD has breached the 1.05 level after the eurozone PMIs (50.2) beat expectations to post some gentle expansion in the first month of the year.
The UK figure (50.9) also surprised to the upside, but a ‘stagflationary environment’ will concern investors.
The return to marginal growth in the eurozone for the first time since August is mildly reassuring for the ECB, but no gamechanger.
A 50bp cut was never on the table anyway and this report is unlikely to dissuade policymakers from cutting at the next two meetings at least.
There will be some concern about the inflationary outlook, however, given that output prices grew at the fastest rate in five months. The market is beginning to pare back its bets for rate cuts this year.
While the headline figure for output growth in the UK is positive, some of the details are quite frightening, though unsurprising. Incoming business has been falling for two months, cost pressures are rising, and the indicated level of job shedding is comparable to the Financial Crisis.
As we have seen with virtually every soft data print in the UK since Q3, it comes down to a post-budget drop in confidence and the paring back of hiring plans ahead of the tax increases. Intensifying inflationary pressure has trimmed expectations for rate cuts somewhat, but it is unclear how much this can translate into sterling strength given the tight fiscal outlook and a stagnant economy.
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