EUR/GBP has been bearish for about a year now, although the decline has lost pace since April last year. Although, it continues to make lower highs as well as lower lows. The Bank of England turned hawkish last month, increasing interest rates from $0.10 to 0.25% which helped the GBP turn bullish, sending EUR/GBP lower, but the ECB is also turning hawkish slowly, as inflation increases in Europe.

This will help the Euro, and in the last few days, we have seen EUR/GBP find support at the previous low below 0.84. The manufacturing reports from the Eurozone came mostly positive today, showing that the economy is doing well despite the deteriorating sentiment.

Spain December Manufacturing PMI

• December manufacturing PMI 56.2 points vs 56.2 expected
• November manufacturing PMI 57.1 points

“Prices indices remained extremely high, with firms signaling severe inflationary pressures that were having a detrimental impact on client demand. New orders subsequently rose at a more modest rate.

“Moreover, input shortages placed some restriction on productive capabilities, and firms continued to scramble to source inputs and bolster stocks wherever possible. Such pre-purchasing of goods is likely exacerbating pressure on already strained supply chains.

“These difficulties continue to undermine confidence, although firms believe that over the coming year underlying trends in output and demand will be positive.”

Italian December Manufacturing PMI

• Italy December manufacturing PMI 62.0 points vs 62.8 prior
• November manufacturing PMI 62.8 points

A slightly lower reading than in November but growth of output and new work remain close to record peaks. As such, it reflects another robust performance in Italy’s manufacturing sector to cap off the year. That said, backlogs of work rose at a survey record pace amid supply constraints and inflationary pressures remain severe. Markit notes that:

“Italy’s manufacturing sector rounded off the final quarter of 2021 with another solid performance. The PMI remained close to November’s all-time high due to further rapid growth of output and new orders, although the rates of expansion did slow slightly on the month.

“Nonetheless, capacity pressures were again unprecedented, as firms struggled with strong sales and ongoing supply issues. As a result, employment increased sharply.

“Material shortages and rising transport fees also fed through to a further steep rise in input costs, with firms raising their average charges at a near record pace in response. That said, the rates of inflation slowed since November, pointing to some cooling of pressure at the turn of the year.

“In spite of the strong performance, companies moderated their expectations towards output over the next year, with sentiment the weakest since April 2020, as some firms noted concerns surrounding COVID-19, price pressures and supply disruptions.

“That said, the sector remains in a very strong position as we enter 2022 with little sign of growth momentum fading significantly.”

 France December Manufacturing PMI

• France December manufacturing PMI 55.6 points vs 54.9 prior
• November manufacturing PMI 54.9 points

This reaffirms some tentative signs of stability in the French manufacturing sector towards the year-end. The trends in output and new orders showed some improvement but it was a rather subdued quarter overall. As is the case elsewhere in the region, supply constraints and surging price pressures remain key problems to the outlook. Markit notes that:

“The December PMI survey gave us a few reasons to be a bit more optimistic towards the manufacturing sector looking ahead. The Suppliers’ Delivery Times Index registered a meaningful move higher in December. We’re by no means anywhere near out of the woods yet, and a large portion of our survey panel are still seeing shortages and increasing lead times, but there were some reports of improving stock levels at vendors.

 Germany December Manufacturing PMI

• France December manufacturing PMI 57.4 points vs 57.9 prior
• Prelim reading was 57.9 points

There were tentative signs of supply constraints easing last month but the bottlenecks that are persisting continue to hold back manufacturing output and growth conditions for the most part. Markit notes that:

“After a promising start to 2021, the German manufacturing sector’s performance faded as the year went on as unprecedented supply chain constraints took their toll. However, although growth in December was only modest with supply shortages still an issue, the survey’s output index has now ticked up in each of the last two months, to offer some hope that the final quarter of 2021 can be a turning point from which growth starts to pick up as we move through 2022.

Eurozone December Manufacturing PMI

• Eurozone December manufacturing PMI 55.6 points vs 54.9 prior
• November manufacturing PMI 54.9 points

A positive takeaway from the report highlights that supply constraints are easing somewhat but they are still persistent. Firms capitalised on that by adding to inventories at the fastest rate recorded by the survey but manufacturing output and overall conditions remain rather stagnant from November levels.

There was also some easing in price pressures but they remain elevated, holding close to the record highs in the survey. Markit notes that:

“It has been an incredibly challenging period for eurozone manufacturers this second half of 2021, but the latest survey data hasn’t spoiled the festive cheer too much – we’re seeing some tentative, but very welcome signs that the supply chain crisis which has plagued production lines all across Europe is beginning to recede. The Suppliers’ Delivery Times Index increased for a second month in a row to its highest since February, signalling a weaker deterioration in vendor performance.

“Although what gains to be had were only marginal, with shortages, port congestion and transport issues still at large, PMI data showed stocks of purchases rising at a survey-record rate in December. This should hopefully bring some much-needed relief to production schedules in the very near-term, which have been squeezed tight by input shortages. That said, the latest survey data showed output growth remaining subdued overall and unchanged from November.

“Alleviating supply chain pressures also fed through to prices as input costs rose at the slowest rate since April. Easing inflation rates are again a welcome sign, but we’re still in hot territory. We’re now facing a fresh bout of economic uncertainty as the Omicron variant emerges in Europe. COVID-19-driven supply chain disruptions cannot be ruled out, and therefore neither can further spikes in inflation.”