Pound Euro (GBP/EUR) Exchange Rate Steadies in Spite of Record Rise in UK Government Borrowing

Record Increase in UK Government Borrowing Offers Little Support to Pound Euro (GBP/EUR) Exchange Rate

As UK government borrowing swelled to its highest level on record in April the Pound Sterling to Euro (GBP/EUR) exchange rate struggled to maintain its positive momentum.

The sharpness of the increase in borrowing highlighted the extent of the impact of the Covid-19 lockdown, pushing government debt higher than the Office for Budget Responsibility’s (OBR) original forecast for the entire year.

While this borrowing looks set to help offset the economic damage of the pandemic Pound Sterling (GBP) still saw limited demand in the wake of the data.

A deeper-than-expected contraction in April’s UK retail sales figure also put a dampener on the GBP/EUR exchange rate, even though the pairing remained above its recent eight-week low.

EUR Exchange Rates Soften as ECB Signals June Policy Action

Support for the Euro (EUR) generally eased, meanwhile, in the wake of a dovish set of European Central Bank (ECB) meeting minutes.

As the minutes noted that the central bank is ‘fully prepared’ to provide further monetary stimulus in June the single currency fell out of favour.

While the ECB appears unlikely to cut interest rates at this stage the prospect of a fresh expansion of the quantitative easing programme left EUR exchange rates biased to the downside today.

With policymakers seeing little chance of an imminent v-shaped recovery anxiety over the economic outlook naturally picked up, offering a boost to the GBP/EUR exchange rate.

Improved German Business Sentiment May Offer Euro Rallying Point

Confirmation that the German economy experienced a deep contraction in the first quarter could keep the Euro under pressure on Monday.

However, EUR exchange rates could also find a rallying point on the back of May’s set of IFO business sentiment surveys at the start of the week.

Any solid uptick in sentiment may fuel hopes that the economy is already starting to recover from the major impact of the Covid-19 crisis.

On the other hand, the mood towards the Euro could sour further if the expectations index falls short of forecast or shows a deterioration.

Evidence of doubt over the health of the economic outlook may hamper the potential for any Euro recovery in the near term.

Further Evidence of Weak UK Economic Activity to Limit Pound Potential

Demand for the Pound may weaken on the back of May’s CBI distributive trade index, meanwhile.

Fresh evidence of weakness within the UK economy would add to the odds of a deeper second quarter contraction and likely recession, putting pressure on GBP exchange rates.

As long as the Covid-19 lockdown looks set to weigh on economic activity for the foreseeable future, in spite of the government’s move to lift some restrictions, the potential for Pound gains appears limited.

Unless the UK economy can demonstrate greater signs of resilience in the second quarter the GBP/EUR exchange rates could come under a fresh bout of selling pressure in the week ahead.

Louisa Heath

Contact Louisa Heath