Pound Euro (GBP/EUR) Exchange Rate Rallies in Spite of German Economic Sentiment Recovery

Improved German Economic Sentiment Unable to Drag Pound Euro (GBP/EUR) Exchange Rate Lower

A solid improvement in the German ZEW economic sentiment index failed to put the Pound Sterling to Euro (GBP/EUR) exchange rate under pressure for long.

Although the headline index strengthened from 28.2 to 51.0 in May this was matched by an unexpected deterioration in the accompanying current conditions index.

All in all, this painted a mixed picture of the health of the Eurozone’s powerhouse economy, highlighting the significant challenges still facing Germany in the wake of the Covid-19 lockdown.

While fears of a second wave of infections have eased in recent days this was not enough to keep the Euro (EUR) from stumbling against its rivals.

Spike in UK Jobless Claims Fails to Dent Pound Demand

While UK jobless claims surged in April Pound Sterling (GBP) was able to hold onto a positive footing against many of the majors, meanwhile.

Even though the claimant count rose 69% in a single month the GBP/EUR exchange rate still pushed higher this afternoon, buoyed by the general improvement in market sentiment.

As the first quarter labour productivity rate saw a smaller decline than forecast this offered some reassurance to the Pound.

With market anxiety over Brexit starting to fade, for the time being at least, GBP exchange rates found renewed support, in spite of lingering uncertainty hanging over the economic outlook.

GBP/EUR Exchange Rate Vulnerable to Softer UK Inflation Reading

Support for the Pound could weaken on Wednesday, however, if April’s UK consumer price index data weakens as anticipated.

With the headline inflation rate looking set to dip from 1.5% to 0.9% on the year the case for further Bank of England (BoE) policy action could pick up.

In the wake of recent comments from BoE Chief Economist Andy Haldane markets are more sensitive to the prospect of interest rates seeing a cut into negative territory.

As long as markets see an increased risk of the central bank taking action in the months ahead the GBP/EUR exchange rate looks vulnerable to a renewed downtrend.

Deteriorating Eurozone Consumer Confidence Set to Weigh on Euro

Worries over the Eurozone economy may pick up, meanwhile, unless May’s consumer confidence index betters forecast.

A fresh decline in the index could fuel market anxiety over the risk of a deeper Eurozone recession, leaving the Euro exposed to another bout of selling pressure.

Without evidence that consumer sentiment has started to bounce back from the lows seen in the depths of the Covid-19 lockdown support for the single currency could prove limited.

Increasing anticipation ahead of May’s set of Eurozone manufacturing and services PMIs may also drag on EUR exchange rates this week.

With investors bracing for another month of contraction across the board the potential for further GBP/EUR exchange rate gains remains.

Louisa Heath

Contact Louisa Heath