Favourable data for euro, dreadful for pound (Daily analysis 22.01.2021)

PMI readings for January support the euro but send the pound sterling into freefall as the US dollar ends the week in the same fashion it started: with modest gains.

Eurozone's PMIs point to further resilience of manufacturing sectors of key economies. Moreover, the level of optimism for the next 12 months soared to the highest one in three years. More importantly, today's data prove that the services might avoid the dreadful scenario.

Good news for the euro, bad for the pound

The most significant publications of business sentiment turned out to be positive for the common currency but proved to be a punch to the pound sterling. The euro remained stable throughout the week, with the dollar slightly depreciating and the Scandinavian currencies gaining in value: the Norwegian krone cost the most in several months.

The European economy is staying strong…

European services are coping with the second wave of the pandemic somewhat better than one might have feared considering the scale of restrictions - such conclusions can be drawn from today's PMI readings. The data for the German economy, which is the most important one from the point of view of the zloty, turned out relatively best. The index slipped only from 47 to 46.8 points. Of course, such a value means that the sector is in decline, but companies remain relatively optimistic, or at least there are no signs of panic comparable to that seen in the spring. At the same time, today's reports confirm that the industry is slightly affected by the second wave of disease and that the good economic situation persists.

Information from the economy allows the euro to resist the dollar's strength, which on Friday appreciates against most of the main currencies, especially those traditionally considered riskier. The EUR/USD pair remains close to 1.22.

...British economy slows down sharply

While the PMI reports supported the single currency, the same data punched the pound. The decline in services was the strongest since the spring crash and much more severe than predicted. This development pushes the pound to the defensive. For most of the week, the British currency was strong against the euro and dollar, but an attempt to permanently take the GBP/USD pair above 1.37 and to new long-term highs will most probably fail.

A sharp turn, such as the one observed today, often cools down enthusiasm towards a currency for longer. Especially as the pound's weaknesses are confirmed: a fragile economy and unfavourable balance of payments trends. These should stand in the way of maintaining the rally of the British currency resulting from the avoidance of a no-deal Brexit scenario.