Stronger PMIs shift focus from growth gap to rate path

February’s flash PMIs surprised modestly to the upside in both the eurozone and the UK, but the mix matters more than the headline.

The eurozone improvement is manufacturing-led and Germany-centred, signalling that the industrial drag is easing. The UK rebound is broader, with manufacturing momentum strengthening and export demand accelerating. The net result is growth convergence, which pulls GBPEUR back toward relative rate pricing as the main driver in the early part of 2026.

In the eurozone, activity rose at the fastest pace in three months, with the improvement described as most notable in manufacturing.

The manufacturing PMI returned to expansion at 50.8, a 44-month high, and factory output rose to a six-month high, with Germany central to the shift. The qualifier is that this still reads as stabilisation rather than a demand-led upswing: overall new orders remain modest, foreign demand is still contracting, and firms remain reluctant to hire.

Input costs have picked up again, led by manufacturing, while services price pressure has eased somewhat, a mix that supports an ECB stance of patience rather than urgency.

In the UK, the composite PMI edged up to 53.9, a 22-month high. Manufacturing is now contributing more meaningfully, with the manufacturing PMI at 52.0 and output at 53.6, and export orders rising at the fastest pace in four-and-a-half years. The vulnerability is the labour signal: employment fell for a seventeenth consecutive month, led by a sharp drop in services payrolls, with firms citing redundancies, hiring freezes, and the after-effects of the 2025 Autumn Budget. That keeps the BoE debate open: stronger activity argues against aggressive easing, but labour weakness and only modest price pressure argue for continued cuts. We continue to look for a rate cut in March, given the weakness seen across other recent data prints.

For GBPEUR, today’s data weakens any clean European growth-divergence story, for the time being at least.

With both the UK and eurozone expanding, GBPEUR will be driven more by relative rate expectations than by growth momentum alone. Even so, we continue to think this favours slow but steady downside for the cross in the coming months, with the BoE set to continue cutting rates, while the ECB remains on hold.

Author:

Barry van der Laan MBA, Senior FX Market Strategist

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