Pound Sterling Euro (GBP/EUR) Exchange Rate Benefits from Sharp Eurozone Growth Slowdown

Weakening Eurozone Growth Offers Pound Sterling Euro (GBP/EUR) Exchange Rate Rallying Point

As the Eurozone economy saw a sharper slowdown in the fourth quarter than anticipated this encouraged the Pound Sterling to Euro (GBP/EUR) exchange rate to push higher this morning.

Surprise growth contractions in both the French and Italian gross domestic product readings pulled down the performance of the wider currency union, leaving the Euro (EUR) on the back foot.

Given recent signs of weakness within the German economy, this underwhelming performance raised fears that the Eurozone’s powerhouse economy could fall back into a state of recession.

As fresh economic data has proved rather muted so far in 2020 investors saw little cause for confidence in the Eurozone outlook, particularly in the face of wider global slowdown anxiety.

With markets anxious over the possibility of another poor quarterly performance in the first three months of the year EUR exchange rates were left exposed to selling pressure.

UK Consumer Confidence Recovery Adds to Pound Gains

January’s UK GfK consumer confidence index picked up from -11 to -9 as forecast, meanwhile, helping Pound Sterling (GBP) to strengthen.

Although sentiment remained in a negative state investors still took encouragement from this sign of improvement, betting that confidence could pick up further in the months ahead.

However, the significant degree of uncertainty still surrounding the issue of Brexit and the future relationship between the UK and EU may put a dampener on GBP exchange rates in the near future.

As doubts remain over the two sides’ ability to achieve a comprehensive trade agreement before the end of the year this could limit the potential for further GBP/EUR exchange rate gains.

Evidence of German Slowdown Forecast to Dent Euro Demand

The finalised raft of Eurozone manufacturing and services PMIs for January could prompt additional losses for the Euro next week.

Confirmation that the German manufacturing sector remained trapped in a state of contraction at the start of the year would leave the single currency biased to the downside.

With the spread of the Wuhan coronavirus looking set to drag on both Chinese and global growth in the first quarter any fresh signs of German weakness could weigh heavily on the Euro.

As long as global trade looks set to slow further over the course of the quarter EUR exchange rates could struggle to recover their lost traction.

Solid Finalised UK Services PMI Set to Shore up GBP Exchange Rates

Demand for the Pound, meanwhile, could remain elevated if the UK service sector is confirmed to have bounced back at the start of the year.

On the other hand, any negative revision to the finalised PMI reading may leave the GBP/EUR exchange rate vulnerable to renewed selling pressure.

Given the Bank of England’s (BoE) decision to leave interest rates on hold this month a solid set of UK PMIs could further limit the risk of a potential 2020 rate cut.

Any signs of underlying softness within the UK economy could dent the Pound, though, as markets continue to weigh up the impact of the country’s departure from the EU.

Louisa Heath

Contact Louisa Heath