Pound Euro (GBP/EUR) Exchange Rate Bounces Back as German Production Tanks

Slump in German Production Offers Pound Sterling Euro (GBP/EUR) Exchange Rate Rallying Point

A fresh monthly slump in German industrial production helped the Pound Sterling to Euro (GBP/EUR) exchange rate return to a positive footing this morning.

As production plunged by an unexpectedly sharp -3.5% in December this highlighted a lack of resilience within the Eurozone’s powerhouse economy, leaving the Euro (EUR) on the back foot.

While export volumes saw a modest improvement on the month this failed to shore up the single currency, given that forecasts had pointed towards a stronger recovery in export demand.

With confidence in the global trade outlook still decidedly limited markets see a significant risk of the German trade surplus continuing to narrow in the months ahead, leaving EUR exchange rates biased to the downside.

Stronger UK House Prices Shore up Pound Sterling

Support for Pound Sterling (GBP), meanwhile, picked up thanks to a stronger-than-expected Halifax house price index report.

Prices avoided a stagnation in January, instead delivering growth of 0.4% on the month and suggesting a greater level of domestic confidence.

Hopes that UK households recovered some of their lost positivity at the start of 2020 offered a modest boost to the GBP/EUR exchange rate, in spite of lingering Brexit-based uncertainty.

However, as Russell Galley, a managing director at Halifax, noted:

‘It’s too early to say if a corner has been turned. The recent positive figures may actually represent activity that would ordinarily have been expected to take place last year, but was delayed by economic uncertainty. So while housing market activity has undoubtedly increased over recent months, the extent to which this persists will be driven by housing policy, the wider political environment and trends in the economy.’

GBP/EUR Exchange Rate Vulnerable to Signs of Slowing UK GDP

Further volatility could be in store for the GBP/EUR exchange rate next week on the back of the fourth quarter UK gross domestic product data.

Any evidence of a slowdown in the quarterly growth rate could see the Pound fall out of favour on Tuesday, given the negative headwinds still facing the UK economy.

With a significant degree of uncertainty still surrounding the ultimate shape of the UK’s future relationship with the EU any weakening in growth momentum may weigh heavily on GBP exchange rates.

As investors see a risk of the economy slowing further in the first quarter, thanks to the unresolved issue of UK-EU trade, the mood towards the Pound looks likely to sour unless the GDP data can deliver an upside surprise.

Signs of German Economic Slowdown May Drag on Euro

Focus will also fall on the fourth quarter German gross domestic product figures, with markets still wary of the potential for a fresh slowdown in growth.

If the Eurozone’s powerhouse economy shows signs of slipping back into a state of contraction the Euro looks set to fall further out of favour.

On the other hand, a demonstration of economic resilience could help to encourage EUR exchange rates to return to a positive footing next week.

As worries over the health of the global economy continue to mount, though, this could limit the potential for Euro gains.

Louisa Heath

Contact Louisa Heath