Pound Sterling Euro (GBP/EUR) Exchange Rate Rises as Crippling Lockdown Measures Weigh on German Growth
UPDATE: The Pound Sterling Euro (GBP/EUR) exchange rate edged around 0.3% higher on Monday afternoon, leaving the pairing trading at around €1.1219.
The Euro remained under pressure today after the Bundesbank stated the German economy would suffer a severe contraction in the second quarter.
Germany’s central bank said this will happen despite the country’s easing of the crippling lockdown restrictions that have been put in place to slow the spread of the coronavirus.
In the report, the Bundesbank stated:
‘Despite the easing measures that have been introduced, social and economic life in Germany is still very far from what was previously considered normal. The available economic indicators paint a correspondingly bleak picture.’
The German economy has been left dented after earlier data showed GDP plummeted by -2.2% in the first quarter. This was the steepest fall since 2009.
Added to this, the bank’s monthly report stated that output would be ‘significantly lower’ in the second quarter.
While Germany has begun to lift the lockdown measures which will help growth, the bank stated that many of these restrictions were likely to stay in place for an extended period of time. Growth is also likely be hit as consumers remain overly cautious.
Pound Sterling Euro (GBP/EUR) Exchange Rate Muted as BoE Considers Negative Interest Rates
The Pound Sterling Euro (GBP/EUR) exchange rate remained largely flat on Monday morning, leaving the pairing trading at around €1.1199.
Sterling remained under pressure today as talk about negative interest rates pushed the British currency towards a two-month low.
Optimism about the easing of lockdown measures around the world could do little to offset this.
Centres of the coronavirus outbreak, Italy and New York began to gradually ease restrictions.
Meanwhile, in an interview with the Telegraph, the Bank of England’s (BoE) chief economist, Andy Haldane did not rule out negative interest rates.
As the UK slides towards a deep recession, the BoE is looking at different options. These include negative interest rates and buying riskier assets.
In his interview with the newspaper, Mr Haldane refused to rule out the possibility of taking interest rates into negative territory. He stated:
‘The economy is weaker than a year ago and we are now at the effective lower bound, so in that sense it’s something we’ll need to look at – are looking at – with somewhat greater immediacy. How could we not be?’
This followed comments from BoE Governor, Andrew Bailey on Thursday. Bailey stated the bank was not contemplating negative rates, although he declined to rule this out altogether.
Stalemate in Brexit Negotiations Weighs on Sterling (GBP)
Meanwhile, the Pound was also left under pressure as a stalemate in Brexit negotiations with the European Union weighed on the currency.
This stalemate has raised the prospect that the UK will be unable to strike a deal on the country’s formal departure from the EU at the end of the transition period.
This would damage global trade as the global economy copes with the economic chaos caused by the coronavirus crisis.
Commenting on this, FX and global macro strategist at Arkera, Viraj Patel noted:
‘We’ve seen sentiment around Sterling flip from positive to negative in recent weeks as investors shift focus to local idiosyncratic risks.
‘Talk of negative rates in the UK (with markets slowly pricing in this reality) – as well as the renewed threat of a ‘No Deal’ Brexit once the transition period ends this year – are materially weighing on the Pound.’
Euro (EUR) Muted as Italy’s Debt Mountain Continues to Grow
Meanwhile, Italy and Spain are amongst a number of European countries that are set to continue to ease lockdown restrictions.
However, the single currency remained muted as Italy’s already huge public debt continued to grow due to the coronavirus crisis.
Authorities in Italy are now calling on its citizens to help fund the recovery efforts.
While the economy is safe thanks to the European Central Bank’s (ECB) huge bond purchases, economists have said debt is headed towards at least 170% of national output in 2020.
Analysts have said a doomsday for the bloc’s third-largest economy is inevitable. Italy has been unable to lower their debt mountain, and cannot rely on the ECB forever.
However, Italy’s debt management chief, Davide Lacovoni noted the Treasury was not concerned with what will happen once the ECB scales down its purchases. He stated:
‘Once we are out of this emergency we will return to a situation of fully functional markets, without the ECB or with a minimal ECB presence.
‘The underlying structure of our public finances are under control, now we are tackling this emergency situation but immediately afterwards the government will be committed to a debt reduction strategy.’
Pound Euro Outlook: Will German Economic Sentiment Boost EUR?
Looking ahead, the Pound (GBP) could slump lower against the Euro (EUR) on Tuesday morning following the release of labour market statistics.
If data reveals Britain’s unemployment rate jumped higher in March while the number of people claiming unemployment in April has increased more than expected, GBP will slide.
Meanwhile, the single currency could be offered some support following the release of Germany’s ZEW surveys.
If both May’s German economic sentiment and current conditions improves more than expected, the Pound Euro (GBP/EUR) exchange rate will edge higher.