Surprise Stagnation in UK Growth Fails to Halt Pound Sterling to Euro (GBP/EUR) Exchange Rate Uptrend

Weaker Monthly GDP Fails to Dent Pound Sterling Euro (GBP/EUR) Exchange Rate

UPDATE: A surprise stagnation in August’s monthly gross domestic product failed to weigh on Pound Sterling (GBP) today.

Investors were instead encouraged by the healthier nature of the three-month rolling GDP, which pointed towards greater economic resilience with an acceleration of 0.7%.

Coupled with fresh market hopes of an imminent Brexit deal this kept the Pound Sterling to Euro (GBP/EUR) exchange rate on a modest uptrend.

Italian Budget Defiance Encourages Pound Sterling to Euro (GBP/EUR) Exchange Rate Gains

UPDATE: As Tria indicated that the Italian government will not be swayed by any fallout on the financial markets this encouraged further investor jitters.

Until the budget issue is resolved the GBP/EUR exchange rate is likely to benefit, seeing limited downside potential thanks to the weaker single currency.

Worries Over Italian Budget Plans Continue to Limit Euro (EUR) Exchange Rates

UPDATE: Comments from Italian Economy Minister Giovanni Tria failed to encourage demand for the Euro (EUR) this afternoon.

Although Tria called for a ‘constructive discussion’ with EU officials over controversial budget plans this was not enough to ease market worries over the threat of a potential Italian debt crisis.

With the Italian government looking set to hold steady on plans to target a deficit in excess of EU budget rules the potential for a Euro recovery appears limited.

Bigger German Trade Surplus Weighs on GBP/EUR Exchange Rate

Support for the Euro (EUR) proved limited this morning thanks to the mixed nature of August’s German trade data and lingering tensions over Italian budget plans.

While the trade surplus widened from €16.5bn to €17.2bn on the month, the shift was largely driven by a sharp slump in import volumes, which unexpectedly declined -2.7%.

Exports failed to show any meaningful improvement, meanwhile, with a contraction of -0.1% highlighting the persistent pressure on the German economy.

EUR exchange rates also remained on the back foot thanks to the ongoing spat between Italian politicians and the European Commission.

With the Italian budget proposal looking set for rejection markets continue to fear the prospect of a fresh debt crisis, limiting demand for the Euro.

IMF Warnings over Brexit Limit Pound Sterling (GBP) Demand

Confidence in Pound Sterling (GBP) also proved limited, however, as the International Monetary Fund (IMF) downgraded its UK growth forecast.

As the IMF offered a fresh warning over the dampening effect that Brexit-based uncertainty has had on the health of the UK economy the mood of GBP exchange rates soured.

Investors were also discouraged by a call for greater caution on the part of the Bank of England (BoE), with the prospect of further monetary tightening already looking muted.

In its latest report the IMF noted:

‘In the United Kingdom, where the output gap is closed and unemployment is low, a modest tightening of monetary policy may be warranted, although at a time of heightened uncertainty, monetary policy should remain flexible in response to changing conditions associated with the Brexit negotiations.’

With GBP sentiment already dented by less optimistic government comments on Brexit the prospect of the BoE easing interest rates left the GBP/EUR exchange rate with little in the way of support.

Pound Sterling Euro (GBP/EUR) Exchange Rate could Remain under Pressure from Slowing UK GDP

The Pound could come under further pressure on Wednesday if the latest monthly UK gross domestic product data disappoints.

Forecasts point towards a fresh loss of momentum in August, with growth expected to show a slowdown from 0.3% to 0.1% on the month.

After an insipid second quarter GDP figure investors are unlikely to welcome any further signs of weakness in the third quarter, leaving GBP exchange rates biased to the downside.

A widening of the UK visible trade deficit or underwhelming production data could add to the bearish mood of Pound Sterling, meanwhile.

German Inflation Uptick to Support Euro (EUR) Exchange Rates

Friday’s finalised German consumer price index data may offer EUR exchange rates a rallying point if the figures confirm an uptick in inflationary pressure.

Evidence of rising prices within the Eurozone’s powerhouse economy could bolster the appeal of the single currency even in the face of political jitters.

Stronger inflation would increase the pressure on the European Central Bank (ECB) to tighten monetary policy further in the months ahead.

If the case for greater ECB hawkishness improves this could see the Pound Sterling to Euro (GBP/EUR) exchange rate trending lower once again.

Hannah Wilson

Contact Hannah Wilson