Published: February 26th, 2025
Standard & Poor's (S&P) Flash Eurozone Composite PMI rating remained steady at 50.2 in February, up just slightly from 50.1 in January.
A second straight month of merely marginal growth points to a decline in overall business sentiment, the ratings agency said, while inflationary signals have resurfaced. That casts doubt on the strength of the recent Eurozone recovery, and highlights the significance of Germany’s political turmoil and a contraction in French economic output.
In a note responding to the S&P survey, analysts at ING Bank wrote that ‘the latest figures suggest that month-on-month growth in the bloc is around zero percent. That isn’t cause for celebration, but isn’t necessarily cause for alarm either. Nothing in the S&P PMI reading suggests activity is deteriorating further.
ING notes that signs of Eurozone weakness are concentrated in France as Germany, while other countries in the bloc all demonstrated output growth.
In the services sector, which has been a key driver of Eurozone growth, the PMI reading fell to 50.6 from 51.2, a three-month low. Manufacturing, however, showed signs of calm, with the PMI rising to 47.3, a seven-month high.
In Germany, the PMI rose to a nine-month high of 51.0. At the other end of the spectrum, the bloc’s number two economy, France, saw its sharpest economic slump in almost a year and a half, with the PMI cratering to to 44.5 thanks to sharp declines in services output.
‘France is firmly in recession with no end in sight,’ ING added. ‘The negative reading is especially worrying as it’s rooted in the services sector, which had been a resilient sector performer.’
Amid Germany’s recent snap elections and the Trump administration’s ongoing tariff threats, its fair to ask if political instability is once again impacting Eurozone growth.
In June of last year, a surge in EU-skeptic political wins and the calling of a snap election in France put the Euro under broad pressure.
Right-wing parties did particularly well in the June 2024 European Parliamentary elections, especially in Italy and France, where anti-immigration parties including Brothers of Italy (FdI) and National Rally (RN) scored notable wins. French President Emmanuel Macron surprised pundits by calling snap elections for the Assemblée Nationale on the result, adding more political uncertainty to the Eurozone.
An analyst note from Milan-based UniCredit said the Euro had been ‘forced into retreat’ after the election result. This has happened before in the aftermath of European Parliament elections, however this time the cause is a rise in 'Euro sceptic and anti-European parties, which have made gains in the major EU economies. If those are reflected in the upcoming elections for the French National Assembly, it could complicate policymaking.’
Sterling found support amid the continental turmoil, rising against all G10 peers except the US Dollar.
The Pound to Euro rate saw a lift to 1.1823, extending a rally that began with a robust US jobs print that reduced the odds of interest rate cuts by the US Federal Reserve. That in turn reduced the likelihood of UK rate cuts, since traders were betting the Bank of England would fall in line with the Fed in putting off the beginning of another rate-cutting cycle.
It was a different story for the pair in December 2024 when analysts were predicting a slowing UK economy would prompt a Spring rate cut by the Bank of England.
A report by Deutsche Bank’s Forex Strategy Unit suggested Sterling could sink against the Euro to levels last seen during the mini crisis set off by former Prime Minister Liz Truss’ and her disastrous budget of September 2022.
The bank’s analysts said a cooling UK economy could prompt the Bank of England to cut interest rates in May, leading to a decline in the Pound’s value.
In a report published mid-December, Deutsche said the expected speed and timing of the transition from hiking to cutting for G10 central banks ‘will be a significant influencer over their respective currencies next year.’
Under that scenario, Sterling would be disadvantaged by BoE policymakers, who Deutsche believed would cut the Bank Rate in May, even before the US Federal Reserve and European Central Bank made similar moves, closer to mid-year 2024.
'The monetary policy tightening undertaken this year is beginning to cascade through the UK economy,’ Deutsche’s report says. ‘Housing prices are beginning to move into correction territory, but could fall further. The reduction in real estate activity hasn’t impacted labour markets yet. When it does the signs of economic slowdown will become clear very quickly.’
The Bank's base case assumed Threadneedle Street would begin cutting rates in the Spring of this year. Washington and Frankfurt were expected to start their easing cycles closer to mid-year.
The analysis also rated the UK’s balance of trade to be in a poor place, with external accounts turning negative again. Based on that, Deutsche forecast a Pound to Euro exchange rate of 1.11 and 1.0870 by mid-year.
The last time the pair’s rate fell to that level was when former Prime Minister Liz Truss delivered an unfunded budget that caused currency investors to panic and mass-liquidate their GBP holdings.
At the start of 2023, Barclays was calling GBP/EUR a buy on predictions of a hawkish reset by Bank of England policymakers.
The bank’s analysts believed a stronger UK economy and progress in negotiations with Brussels over the Northern Ireland protocol pointed to potential gains for Sterling over its continental cousin.
In a research note published on Monday 23rd January, Barclays said ‘trends in domestic inflation, strong growth, an expected hawkish turn by the (BoE) Monetary Policy Committee, plus more constructive tone from negotiations with the EU bode well for the Pound ahead of February’s bank meeting'.
The call came after a stretch of underperformance for GBP that placed it at the bottom of the G10 major currencies list over most of December 2022.
