EUR/GBP: Pound Weakens As Triple-Dip Recession Threat Mounts

Contrasting economic updates from the UK and the eurozone are foreseen to weigh on the British pound and buoy the euro in the trades today. A surprisingly weak Services PMI report has raised fears that the British economy is headed toward a triple-dip recession this year. Meanwhile, last Friday’s encouraging business activity surveys from the eurozone are deemed to be followed by a modest improvement in the Sentix Investor Confidence report.

Concerns that the UK is “triple-dipping” back into recession escalated last Friday as a closely-watched gauge of the dominant services sector showed output contracted for the first time in two years. The Services PMI dropped from 50.2 points to 48.9 points, below the 50 mark that separates expansion from contraction. It is the lowest reading since April 2009 and widely missed expectations of a modest increase. The slide in sector output was driven by new business dropping off for a second consecutive months, with firms reporting clients are wary of spending amid economic uncertainty.

The contraction in services, which account for three-quarters of Britain’s economic output, suggests that the UK economy shrank in Q4. Markit estimates that overall, the surveys indicate that the economy contracted by 0.2 percent in the December quarter. If output declines again this quarter, the UK will then fall into its third recession in five-years – an unprecedented triple dip.

Meanwhile, conditions are starting to look bright for the eurozone economy. Business activity in the region logged its slowest contraction in nine months in December, indicating that the bloc could already be past its worst point. Markit’s composite purchasing managers’ index increased to 47.3 points in December from 46.5 points in the previous month. Strength in Germany, the region’s economic powerhouse, offers optimism that that it will continue to overcome the crisis and help lift the eurozone economy overall.

Germany’s composite PMI rose from 49.2 points to 50.3 points, its first growth in business activity since April. Likewise, retail sales in the region inclined 1.2 percent in November, largely offsetting the 1.3 percent drop in October. Likely appending the optimism, the Sentix Investor Confidence is projected to improve from -16.8 points in December to a score of -13.7 this month, potentially its best reading in ten months. As such, although a recovery could still be months away, the reports paint a slightly brighter outlook for the future. Considering these, a long position is advised for the EUR/GBP today.