Euro Edges Higher Against Pound as Eurozone and UK PMIs in Focus

The euro edged higher against the pound for a second consecutive session on Wednesday, trading around 0.8582, though it remains in the middle of its recent trading range. Volumes were thin, with investors awaiting the preliminary September purchasing managers' index readings for the eurozone and the UK for fresh clues on the divergence in growth momentum between the two economies.

**PMI Data Key to Short-Term Direction**

The market broadly expects the eurozone's September HCOB composite PMI to show modest expansion, with the services activity index forecast to tick up to 51.7 from August's 51.6, while manufacturing is expected to hold steady at 52.7. In-line or better-than-expected data could provide temporary support for the euro. However, some analysts warn that certain strong readings may reflect businesses front-loading purchases due to concerns over rising prices, rather than genuine demand. On the UK side, its PMI performance is equally crucial—any notable weakening could undermine the pound, while the opposite could weigh on the euro against sterling.

**Inflation and Central Bank Policy Outlook Intertwine**

Both sides of the English Channel currently face stubborn inflationary pressures. Reports show UK services input cost inflation recorded its sharpest monthly acceleration in nearly 30 years, while eurozone input costs rose at the fastest pace since late 2022, driven largely by surging fuel costs. This leaves the Bank of England and the European Central Bank in a similar dilemma: whether to tighten policy to curb inflation or hold steady to protect weak economic growth. Markets expect neither central bank to act at next week's meetings, but any subtle shift in policy language could trigger currency volatility.

**External Factors Add Uncertainty**

Broad dollar buying is also weighing on both the euro and the pound. According to strategists at ING, the risk-off rotation triggered by overnight declines in US stock index futures is the clearest dollar-positive factor in the current environment. If risk aversion persists, it could cap the euro's upside against the pound, keeping the pair range-bound.