Brexit Extended as Poor PMIs Raise Eurozone Recession Concerns

03/22/2019 10:07 am EST

Focus: GLOBAL

Fawad Razaqzada

Technical Analyst, FOREX.com

Recessionary numbers hit Eurozone as UK gets conditional Brexit extension, writes Fawad Razaqzada.

The EUR/GBP has been on a rollercoaster ride over the past couple of weeks as market participants reacted to the latest Brexit headlines while keeping a close eye on a deteriorating Eurozone economy. The Chunnel’s volatility spiked further since last night, as the pound initially rose on the back of news the EU made a conditional agreement to extend Brexit, while the single currency slumped on the back of very poor flash Purchasing Manager Index (PMI) data from the Eurozone’s largest economies this morning. The losses for the EUR/GBP has been somewhat contained as the GBP/USD has also fallen back this morning alongside the EUR/USD, although to a lesser degree.

Eurozone PMIs sink

  • German Manufacturing PMI 44.7 vs. 48.0 expected and 47.6 last
  • German Services PMI 54.9 vs. 54.8 expected and 55.3 last
  • French Manufacturing PMI 49.8 vs. 51.4 expected and 51.5 last
  • French Services PMI 48.7 vs. 50.6 expected and 50.2 last
  • For the Eurozone as a whole:
    -Manufacturing PMI 47.6 vs 49.5 expected and 49.3 last
    -Services PMI 52.7 as expected and 52.8 last

The PMI numbers are leading indicators of economic health. As businesses react quickly to changing market conditions, it is reasonable to expect purchasing managers to hold the most current insight from the companies’ point of view of the economy. So, the fact that they reported sharply deteriorating conditions for March is not a good sign. In fact, these numbers are recessionary.

Brexit extended

The UK was meant to officially leave the EU with or without a deal next Friday, March 29. But the deadlock in parliament meant an extension was required. The EU agreed to delay the Brexit date until 22 May but only if Theresa May's deal is approved by Parliament  in the next week. However, if Parliament rejects May's deal yet again, then the UK will have a shorter delay of April 12, by which date it must tell the EU what it wants to do next.

A third rejection of May’s divorce bill would further raise the prospects of a no-deal Brexit, which could be pound-negative. As such, the losses for the EUR/GBP could be limited in the short-term outlook. But if May’s deal is passed at the third time of asking, and the UK eventually does leave the EU with a deal, then we think this pair could fall a lot further over time.

EUR/GBP Daily
Source: TradingView and FOREX.com.

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