GBP/EUR Exchange Rate Volatile as Draghi Says Risks to Eurozone Growth ‘Tilted to Downside’

GBP/EUR Exchange Rate Volatile as Mario Draghi Says Risks to Eurozone Growth ‘Tilted to Downside’

UPDATE: The European Central Bank (ECB) left its benchmark interest rates unchanged today, keeping them at 0%, which saw the Pound Euro (GBP/EUR) pairing spike to an inter-bank rate of €1.1511 before sliding back down to €1.1476.

President of the ECB, Mario Draghi, reaffirmed the bank’s stance to keep interest rates at 0% in the near future through the summer of 2019, and ‘longer, if necessary.’

Draghi further stated:

‘The risks surrounding the Euro area growth outlook have moved to the downside on account of the persistence of uncertainties related to geopolitical factors and the threat of protectionism, vulnerabilities in emerging markets and financial market volatility.’

Pound Euro (GBP/EUR) Exchange Rate Rallies as Eurozone Economy Edges Closer to Stagnation

This morning, following the release of a mixed bag of manufacturing and services PMIs for the Eurozone, the Pound Sterling Euro (GBP/EUR) exchange rate has rallied slightly, and is currently trading at an inter-bank rate of €1.1498.

The release of the Markit composite PMIs showed that business growth in the Eurozone stalled to a five and a half year low in January, as the economy edged closer to stagnation.

Commenting on the data, Chris Williamson, Chief Business Economist at IHS Markit stated:

‘The Eurozone economy slipped closer to stall speed in January, with companies reporting the first drop in demand for over four years.

‘Both the manufacturing and service sectors are close to stagnation, highlighting the broad-based nature of the current slowdown. Ongoing auto sector weakness, Brexit worries, trade wars and the protests in France were again widely cited as factors dampening growth, but the survey responses indicate that a deeper malaise has set in at the start of the year.’

Euro (EUR) Weakened by Subdued Growth of German Business Activity

This morning, as January’s Markit manufacturing and services PMI were released for Germany, the data showed that the manufacturing sector had contracted further-than-expected to 49.9, while the services PMI had jumped to 53.1.

The data revealed that German business activity growth subdued, the slowest rate of growth over the last four years, likely weakening sentiment in the Euro (EUR).

Phil Smith, Principle Economist at IHS Markit said:

‘The Germany PMI broke its recent run of successive falls in January thanks to a stronger increase in service sector business activity, but the growth performance signalled by the index was still one of the worst over the past four years.

‘[…] Firms are also showing greater caution towards hiring with job creation at a 25-month low, though in a historic context these are still healthy employment figures.’

Yesterday: Pound (GBP) Jumps on Comments Suggesting a Delayed Departure from EU ‘Most Likely’

Yesterday morning, the Pound (GBP) rallied on the back of comments made by former UK Chancellor, George Osborne, who stated that a delay to the UK’s departure from the European Union was the ‘most likely’ option.

Osborne also noted that if MPs do nothing, a no-deal Brexit would happen, adding:

‘It’s not enough for there to be parliamentary majority against no-deal – the law of the land says that unless we come up with an alternative, MPs can coalesce around, no-deal happens.’

GBP/EUR Outlook: Will the Euro Slide on a Dovish ECB?

Later today the European Central Bank (ECB) will release its latest interest rate decision, which is forecast to remain at 0% keeping policy unchanged, with the prospect of a dovish tone from ECB President Mario Draghi likely to cause the Euro (EUR) to slip.

Policymakers may acknowledge the slowdown in the Eurozone’s economic growth, which could raise the prospect of further policy normalisation being delayed, as growth appears a lot weaker compared to just a few weeks ago.

Brexit is likely to remain in focus, as any further indication that the likelihood the UK will avoid a no-deal Brexit increases, keeping Sterling (GBP) buoyed.

Meanwhile, Michel Barnier, the EU’s Chief Negotiator has warned that the UK will face a no-deal Brexit if there aren’t any ‘positive proposals’ made by Britain, and that Theresa May’s withdrawal agreement was the best option available – something that could see the Pound Euro (GBP/EUR) exchange rate come under further pressure.

Hannah Wilson

Contact Hannah Wilson