Pound Sterling to Euro (GBP/EUR) Exchange Rate Knocked Back as UK Budget Deficit Swells

Surprisingly Sharp UK Budget Deficit Widening Drags on Pound Sterling Euro (GBP/EUR) Exchange Rate

A larger-than-expected widening of the UK budget deficit saw the Pound Sterling to Euro (GBP/EUR) exchange rate stumble once again this morning.

As public sector net borrowing swelled to 7.2 billion in June, the highest level of borrowing for the month since 2015, Pound Sterling (GBP) fell out of favour with investors.

This increase in borrowing suggests that the fiscal position of the UK is weaker than previously thought, raising fresh worries over the economy’s resilience in the face of a potential no-deal Brexit.

Anxiety over the Conservative leadership contest also weighed on GBP exchange rates ahead of the weekend, with the two candidates’ various spending pledges looking set to fuel further borrowing.

German Producer Price Index Contraction Dents Euro (EUR) Exchange Rates

The mood towards the Euro (EUR) soured, meanwhile, as June’s German producer price index data fell short of forecast.

As the monthly price index contracted -0.4% this suggests that inflationary pressure within the Eurozone’s powerhouse economy remains muted, to the detriment of EUR exchange rates.

With the European Central Bank (ECB) looking increasingly likely to loosen monetary policy in the months ahead investors see little reason to favour the single currency over its rivals.

Given the disappointing nature of the recent ZEW economic sentiment surveys the outlook of the Eurozone economy remains muted, especially in the face of escalating global trade tensions.

GBP Exchange Rates Set for Volatility on Conservative Leadership Result

Reaction to the result of the Conservative leadership contest is expected to provoke fresh volatility for the GBP/EUR exchange rate on Monday, regardless of which candidate wins.

With both Jeremy Hunt and Boris Johnson having taken an increasingly hard-line on the subject of Brexit the Pound looks set to remain under pressure for the foreseeable future.

As long as the UK appears at risk of crashing out of the EU without a deal in October the potential for GBP exchange rate strength could prove limited.

Pound Sterling could also weaken on Monday if the third quarter CBI business optimism index shows a fresh deterioration.

Forecasts point towards the index dipping from -13 to -14 on the quarter, highlighting the chances of the economy losing further momentum in the months ahead.

Eurozone Consumer Confidence Improvement to Offer Euro (EUR) Boost

EUR exchange rates could find a rallying point on the back of Tuesday’s Eurozone consumer confidence index, meanwhile.

While investors expect the index to remain in negative territory an improvement from -7.2 to -6.5 may still offer the Euro some cause for confidence.

On the other hand, if sentiment deteriorated further on the month in July this would leave the single currency vulnerable to another bout of selling pressure.

Any fresh signs of weakening confidence may add to existing anxiety over the outlook of the Eurozone economy, with lower levels of consumer spending likely to drag on growth and EUR exchange rates.

Louisa Heath

Contact Louisa Heath


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