Pound Euro (GBP/EUR) Exchange Rate Bounces Back as Global Monetary Loosening Continues

Weaker German Inflation Signs Lift Pound Euro (GBP/EUR) Exchange Rate from Six-Month Low

After hitting a fresh six-month low yesterday the Pound Sterling to Euro (GBP/EUR) exchange rate returned to a stronger footing, benefitting from an easing in market anxiety.

With the People’s Bank of China (PBoC) opting to loosen monetary policy further overnight worries over the health of the global economic outlook temporarily diminished.

Support for the Euro (EUR) also faltered in the wake of a deeper deterioration in February’s German wholesale price index than anticipated.

With signs pointing towards a weakening in inflationary pressure within the Eurozone’s powerhouse economy the case for further European Central Bank (ECB) action appeared to increase.

Euro Vulnerable to German Regional Election Fallout

While developments surrounding Covid-19 look set to dominate the headlines for the foreseeable future EUR exchange rates could shed further ground in the wake of German regional elections over the weekend.

Given the existing uncertainty surrounding Chancellor Angela Merkel’s successor any signs of a shift in the political balance could put pressure on the single currency.

With the German economy already on the back foot thanks to the global trade slowdown and Covid-19 disruption any political surprises could weigh heavily on Euro sentiment.

Unless markets see higher odds of the German government committing to a degree of fiscal stimulus in the months ahead any support for the single currency may prove limited.

Italian Slowdown Fears Set to Shore up GBP/EUR Exchange Rate

Growing worries over the health of the Italian economy could equally fuel GBP/EUR exchange rate gains over the coming days.

With the Covid-19 outbreak bringing Italy to an effective standstill the odds of a first quarter growth contraction have continued to mount.

If Italy appears at risk of sliding into a deep recession in the first half of 2020 the appeal of the Euro looks set to diminish further.

As growth in the Italian economy had already shown signs of sluggishness even before the outbreak the threat of significant economic disruption hangs heavily over the EUR exchange rate outlook.

Signs of UK Wage Growth Forecast to Boost Pound

The mood towards Pound Sterling (GBP) could see an improvement next week, meanwhile, if Tuesday’s wage growth figures prove encouraging.

While a combination of Brexit-based uncertainty and Covid-19 disruption look set to drag on the UK economy in the months ahead any evidence of resilient wage growth could offer the Pound a boost.

As stronger average weekly earnings could help to fuel consumer confidence an improvement here may drive hopes of domestic spending defying the wider deterioration in global sentiment.

However, as the UK government steps up its response to the Covid-19 pandemic confidence in the potential for a stronger UK growth rate could weaken, leaving the GBP/EUR exchange rate exposed to downside pressure.

Louisa Heath

Contact Louisa Heath