Pound Euro Exchange Rate Strengthens on Plunge in EA Investor Confidence

Pound Euro (GBP/EUR) Exchange Rate Continues to Climb following Drop in EA Economic Sentiment

(Updated 16:00, 10/8/21) The Pound Euro (GBP/EUR) exchange rate has gained further ground this afternoon, as markets digest the disappointing plunge in both Germany’s and the Eurozone’s ZEW economic sentiment indexes.

Both indexes hit their worst levels since November 2020, with worries of a fourth Covid wave in the autumn, new coronavirus variants, and slowing Chinese growth all weighing on business morale.

GBP/EUR broke past €1.183 earlier today – its highest level since before the pandemic began – but has since settled down to just shy of €1.182.

Original article continues below:

Pound Euro (GBP/EUR) Exchange Rate Reaches New 17-Month High

The Pound Euro (GBP/EUR) exchange rate is strengthening today after economic sentiment in both Germany and the wider Eurozone plunged to its worst level since November.

Meanwhile, Sterling remains underpinned by falling UK Covid cases and the Bank of England’s (BoE) shift in stance last week, with GBP/EUR trading around €1.182 – a fresh 17-month high.

Pound (GBP) Gains on BoE and Covid Optimism

The Pound (GBP) is firming today, supported by the UK’s Covid optimism and the BoE’s hawkish tone following last week’s policy decision.

The prospect of the BoE tightening monetary policy in the near future boosted the Pound last week, after the central bank said ‘modest’ action may be necessary if inflationary pressures continue to build. The tailwind continues to propel the Pound upward today, with GBP/EUR now exceeding yesterday’s 17-month high.

Sterling is also supported by the UK’s ongoing optimism in its progress against coronavirus. While UK Covid cases have fluctuated in recent days, the numbers are still well below the dire projections that were circulating in the run up to the 19 July reopening.

Despite rising cases, hospitalisations continue to fall, suggesting that the vaccination programme has been effective at lessening the risk of serious illness.

At the time of writing, 74.8% of the UK adult population have been fully vaccinated – just short of a landmark three quarters. Meanwhile, new data from the Office for National Statistics shows that vaccine hesitancy is falling in the UK, particularly among younger people.

This upbeat outlook continues to cheer GBP investors, despite a lack of UK data today.

Euro (EUR) Weakens on Low Investor Confidence

The Euro (EUR), on the other hand, is struggling today following downbeat ZEW economic sentiment index results for Germany and the Eurozone.

Investor confidence in both Germany and the Euro area dropped even more than predicted, with each index hitting its lowest score since November last year.

Economic sentiment was dented by fears of a resurgence of Covid-19 cases and a slowing global recovery.

Achim Wambach, president of the ZEW, said:

‘expectations have declined for the third time in a row. This points to increasing risks for the German economy, such as from a possible fourth Covid-19 wave starting in autumn or a slowdown in growth in China.’

The gloomy outlook comes in the wake of some disappointing German data, with supply chain disruption denting the European powerhouse’s industrial production in June.

Also weighing on the single currency is its negative correlation to a stronger US Dollar (USD), with the latter benefitting from a more risk-averse market mood.

Pound Euro Exchange Rate Forecast: German Inflation Expected to Surge

Risk sentiment seems to be improving at the time of writing, which may dampen demand for the safe-haven US Dollar and take some pressure off the Euro as we go into the afternoon.

Germany’s inflation rate is set to surge tomorrow, rising from 2.3% in June to 3.8% in July. This could boost the Euro, though any upside might be limited by the European Central Bank’s (ECB) dovish stance.

Thursday brings a number of UK data releases, including GDP, industrial production and business investment. With most results expected to be positive, the Pound could make some gains.