Pound Euro Exchange Rate Trades Sideways as USD Caps EUR Gains
The Pound Euro (GBP/EUR) exchange rate has wavered today, with the Eurozone’s better-than-expected economic sentiment offset by a strengthening US Dollar (USD).
Despite UK consumer credit data indicating a robust economic recovery, Sterling has struggled to gain any ground today, perhaps due to multiple concerns over the UK’s future labour market.
Pound (GBP) Flat as Employment Concerns Undermine Optimistic Economic Outlook
Sterling has been fluctuating today, as the UK’s promising economic recovery is beset by fears of future employment problems.
Data releases from this morning showed that mortgage approvals and lending both beat market forecasts.
Consumer credit in May also exceeded market expectations, rising to £0.28bn. For the first time since August 2020, consumers borrowed more than they paid off.
Laith Khalaf, financial analyst at AJ Bell, said:
Borrowing is on the rise, and savings are falling back, as the lifting of social restrictions has prompted consumers to reach for their wallets. The data is from last month, and so straddles a significant lockdown easing date. Since 17th May, hospitality and leisure businesses have been in fuller swing, so we can expect spending trends to have accelerated since then.
The data points to increased consumer confidence, which in turn is helping to drive the UK’s strong economic recovery.
However, concerns over employment issues may have offset this economic optimism somewhat.
Earlier today, the Society of Motor Manufacturers and Traders (SMMT) warned that if the UK does not drastically increase its battery-making capabilities for electric cars, the UK car industry could lose 90,000 jobs by the end of the decade.
In addition, as government support schemes are phased out, many analysts expect unemployment to rise.
Meanwhile, the Confederation of British Industry (CBI) has warned of staff shortages that could put the UK’s economic recovery at risk and called on government to relax post-Brexit immigration rules.
Euro (EUR) Gains Undermined by USD Strength
The Euro has also had mixed success today, despite the Eurozone’s economic sentiment printing above expectations.
The economic sentiment index rose to 117.9, beating forecasts of 116.5 to reach its highest level since it hit an all-time high of 118.2 in May 2000. The new figure is well above the long-term average and pre-pandemic level of the measure, indicating sky-high morale around the economic prospects of the Eurozone coming out of the pandemic.
The Euro’s gains, however, have been capped by a growing demand for the US Dollar, with the single currency limited by the pair’s negative correlation.
This afternoon’s inflation rate figures from Germany have thus far failed to give the Euro an edge over the Pound, despite meeting market expectations with a 2.3% jump.
Pound Euro Exchange Rate Forecast: USD Upside Could Continue to Cap EUR Gains
This afternoon could see the Euro make some modest gains on the Pound, as markets digest the German inflation figures.
However, the ongoing upside in USD could continue to cap EUR as the day goes on.
With the EU expected to announce a three-month extension to the Northern Ireland protocol grace period, effectively suspending checks on goods crossing the Irish Sea, this could bolster the Pound. Brexit tensions over the Irish Sea border have weighed on Sterling in recent weeks, so a temporary solution to the deadlock could remove some pressure from GBP.