Pound Euro (GBP/EUR) Exchange Rate Edges Away from Multi-Month as Eurozone Sentiment Crashes

Drop in Eurozone Economic Sentiment Shores up Pound Euro (GBP/EUR) Exchange Rate

As March’s Eurozone ZEW economic sentiment index plunged about 50 points the Pound Sterling to Euro (GBP/EUR) exchange rate benefitted.

The sharp drop from 10.4 to -49.5 highlighted the extreme impact that the Covid-19 outbreak has already had on the currency union, dragging the Euro (EUR) down against its rivals.

With France and Italy in a state of lockdown the chances of the Eurozone economy bouncing back in the months ahead look decidedly limited, raising the risk of a potential recession.

While Eurozone governments look set to boost spending in order to shore up businesses, limiting the ultimate toll of the pandemic, this failed to keep EUR exchange rates on a positive footing.

UK Unemployment Rate Miss Fails to Dent Pound Demand

The mood towards Pound Sterling (GBP) saw some improvement, meanwhile, even as the UK unemployment rate unexpectedly picked up from 3.8% to 3.9% in January.

As the UK labour market looks set to come under increasing pressure over the course of the first quarter, given the likely job losses stemming from Covid-19 disruption, this uptick gave investors little cause for confidence.

However, comments from the head of the Office for Budget Responsibility saw the GBP/EUR exchange rate recovering some of its lost ground.

Robert Chote warned that the UK economy is facing a ‘wartime situation’, urging the government to step up its fiscal intervention and engage in a mass expansion of spending.

The prospect of higher government spending gave the Pound a boost, even as fears over the health of the UK economy continued to pick up in the wake of the latest government guidance.

Narrowed Eurozone Trade Surplus to Add to Euro Weakness

Support for the Euro could weaken further tomorrow with the release of January’s Eurozone trade balance report.

Forecasts point towards the headline trade surplus narrowing sharply from 23.1 billion to just 3.9 billion, demonstrating the early impact of global trade disruption.

With trade conditions only looking set to deteriorate further as the Covid-19 crisis grips the world the risk of the trade balance turning negative in the months ahead could weigh heavily on the single currency.

As the Eurozone response to Covid-19 continues to unfold the potential for any EUR exchange rate rally appears limited.

Unless markets see reason to expect the Eurozone to escape a potential recession, through increased fiscal support, demand for the Euro may diminish further over the coming days.

Hopes of Increased Government Spending May Boost Pound

If the UK government delivers fresh spending pledges this could see the GBP/EUR exchange rate climbing further away from its recent lows.

Unless the government takes further action to support struggling businesses in the face of its latest Covid-19 guidance, though, the Pound may struggle to hold onto a positive footing.

The growing risk of a first quarter gross domestic product slowdown could push GBP exchange rates lower across the board once again.

Without the promise of greater support for the UK economy the mood towards the Pound could sour once again as investor anxiety lingers.

Louisa Heath

Contact Louisa Heath