Last Week: GBP/Exchange Rate Performs Well as Eurozone is Threatened by Coronavirus
The Pound to Euro (GBP/EUR) exchange rate performed strongly last week, with the pairing rising from lows of €1.11 to highs of €1.14 as the Eurozone was beleaguered by inner-divides over ‘coronabonds’, joint mutualised bonds requested by Italy to aid nations struggling with the coronavirus.
However, northern European countries like Germany and Austria rejected the suggestion, seeing common debt instruments as a pathway to reducing risk but also raising debts for countries spending within their means.
Consequently, the EUR/GBP suffered from what was perceived as a crack in EU relations.
European Commission Chief Ursula von der Leyen also appeared to shrug off the suggestion of a ‘coronabond’, commenting:
‘Today Europe is mobilising alongside Italy. Unfortunately, this has not always been the case. It must be recognised that in the early days of the crisis, in the face of the need for a common European response, too many have thought only of their own home problems.’
Weak Eurozone economic data also painted a bleak picture of the bloc’s economy going forward. Monday, for example, saw Germany’s flash inflation figure drop to a worse-than-expected 1.3%, well below the European Central Bank’s target in March.
Friday also saw the Eurozone’s composite PMI report for March fall more deeply into contraction territory than was previously forecast, with the figure sinking from 31.4 to 29.7.
However, Friday saw the Euro (EUR) rise against the Pound (GBP) as markets became increasingly wary of the UK’s economic outlook as Britain’s nationwide lockdown looked increasingly set to ravish the economy.
Pound (GBP) Falls as UK Services Sector ‘Sucked into a Black Hole’
The Pound (GBP) maintained much of its gains against the single currency throughout the majority of last week but began to sink on Friday as markets began to shun Sterling for safe-haven currencies like the US Dollar.
Wednesday’s release of the UK Manufacturing PMI for March, which fell deeper into contraction territory from 48 to 47.8 left investors concerned about the health of the British economy going into next month.
But it was Friday’s publication of the UK Services PMI which saw the GBP/EUR exchange rate begin to dip. The report revealed that Britain’s largest sector had fell further into contraction territory than previously expected, with the figure sinking from 35.7 to 34.5.
Duncan Brock, the Group Director at the Chartered Institute of Procurement and Supply, was notably downbeat in his assessment, commenting:
‘The services sector was sucked into a black hole and flung into the unknown by the forceful impact of the COVID-19 coronavirus, affecting every area of supply chains from transport to purchasing levels and job creation.’
GBP/EUR Forecast: Euro to Fall as German Economic Outlook Deteriorates
Euro (EUR) investors will be looking ahead to Monday’s release of Germany’s Factory Orders report for February. Any signs of the Eurozone’s powerhouse economy weakening before the coronavirus took hold would prove EUR-negative.
Tuesday’s release of Germany’s Industrial Production report for February is also expected to fall by -1%. Consequently, we could see the EUR/GBP exchange rate shed some of its gains by the beginning of the week.
However, EUR traders will be eyeing Thursday’s the European Central Bank’s (ECB) Monetary Policy Meeting Accounts. Any dovish comments made by the ECB would also weigh on the Euro.
In UK economic data this week looks relatively lite, with investors instead focusing on the UK’s manufacturing and industrial sector for indications of the nation’s economic health going forward.
The Pound (GBP), meanwhile, will continue to be driven by coronavirus developments. If the UK’s economy increasingly looks set for a disastrous turn in the coming months, however, we could see the GBP/EUR exchange rate continue to slide.