Pound Euro (GBP/EUR) Exchange Rate Bounces Back as Eurozone Investor Confidence Slides

Dip in Eurozone Investor Confidence Offers Pound Euro (GBP/EUR) Exchange Rate Boost

As the Eurozone Sentix investor confidence index dropped from 7.6 to 5.2 in February this encouraged the Pound Sterling to Euro (GBP/EUR) exchange rate to recover some of its lost ground.

This weaker-than-expected reading shows that sentiment within the currency union deteriorated as fears over the outlook of the global economy rose.

Noting the negative impact of the Wuhan coronavirus outbreak, Sentix chief Manfred Huebner commented:

‘In view of the significant declines in Chinese economic data, it is clear that the negative effect is likely to be much greater if it does not become apparent in the coming days that the spread of the virus has been taken away.’

With investor confidence dipping for the first time in four months the appeal of the Euro (EUR) naturally diminished as fears of a weaker first quarter economic performance mounted.

An unexpectedly sharp decline in Italian industrial production added to the bearish mood of EUR exchange rates this morning, with a -2.7% monthly fall boding ill for the wider economic outlook.

Euro Vulnerable to Lack of ECB Optimism

Comments from European Central Bank (ECB) policymakers are unlikely to offer the single currency any particular rallying point tomorrow.

As long as the central bank appears to lean towards dovishness EUR exchange rates may struggle to find much traction in the days ahead.

While markets see little risk of the ECB enacting further monetary loosening in the near future a lack of optimistic policymaker messaging could still weigh heavily on demand for the Euro.

Unless policymakers offer signals of greater confidence in the health of the Eurozone economy support for the single currency looks set to weaken further this week.

Underwhelming UK Growth Data Forecast to Weigh on GBP/EUR Exchange Rate

Demand for Pound Sterling (GBP), meanwhile, could falter once again if the fourth quarter UK gross domestic product data fails to impress.

Any evidence that the UK economy lost fresh momentum in the final three months of 2019 may put a fresh dampener on the GBP/EUR exchange rate on Tuesday.

However, even if the fourth quarter growth rate disappoints the Pound could still find support on the back of a resilient monthly growth reading.

If the gross domestic product returned to positive territory in December this could encourage bets that the economy started to bounce back in the wake of the general election result.

On the other hand, another lacklustre month of economic activity may exacerbate existing worries over the health of the UK economy and its post-EU future.

Softer German Fourth Quarter Growth May Limit Euro Appeal

The fourth quarter German gross domestic product report may offer the GBP/EUR exchange rate a boost on Friday, however.

Markets remain wary of the potential for the Eurozone’s powerhouse economy to slip back into a state of contraction, raising the risk of a potential recession.

Any negative growth reading could see the Euro slump across the board, given the additional headwinds that the German economy has already experienced since the start of 2020.

Unless the growth data delivers a positive surprise the single currency looks set to weaken, giving the GBP/EUR exchange rate room to push higher.

Louisa Heath

Contact Louisa Heath