(Updated 16:00, 10/9/20) The Pound Euro (GBP/EUR) exchange rate traded in a narrow range through Friday afternoon as a lack of data on both sides restricted significant movement.
The Euro (EUR) saw a slight upturn in the latter half of the afternoon, suggesting renewed confidence following yesterday’s dovish decision from the European Central Bank (ECB). A risk-on market mood may have helped to bolster Euro sentiment, as the US Dollar sustained losses over an absence of economic data.
At the time of writing, the Pound (GBP) has recovered a slight upside, finding support despite accusations from the European Commission’s Vice President Maroš Šefčovič. Referring to fresh disputes over the Northern Ireland protocol this week, Šefčovič remarked that ‘the EU has an unwavering commitment to the people of Northern Ireland… and will continue to engage tirelessly with the UK in September.’
Original article continues below:
Pound Euro (GBP/EUR) Exchange Rate Rangebound amid Economic and Political Concerns
The Pound Euro (GBP/EUR) exchange rate is trading in a narrow range this morning, with Sterling marginally up at the time of writing, as both currencies face headwinds.
UK GDP growth stalled in July, while the European Central Bank’s (ECB) policy decision yesterday weighs on the single currency. In addition, signs of political discontent in the EU could be weighing on the Euro (EUR).
Pound (GBP) Muted amid Disappointing GDP
The Pound (GBP) is making marginal gains against the Euro (EUR) this morning, although weakening against other rivals, despite the latest GDP data showing that the UK’s economic recovery stalled in July.
The UK’s GDP three-month average printed at 3.6%, below market forecasts of a 3.8% rise. But the most striking part of the report is that GDP grew by a mere 0.1% in July, versus the 0.6% growth predicted, despite the removal of most lockdown restrictions.
The slowdown in GDP came amid a fall in retail sales and worker shortages due to the ‘pingdemic’, with Covid cases peaking at around 60,000 in the middle of the month and greater freedoms leading to high isolation figures due to contact with people who tested positive for the virus.
Growth in the services sector, which accounts for 80% of UK GDP, completely stalled at 0% as the return of music festivals and sporting events was offset by a sharp fall in high-street sales and the end of the stamp duty holiday.
The supply chain crisis also dented GDP, as rising materials costs and labour shortages caused by Brexit and the pandemic began to bite. Construction fell and manufacturing activity levelled out.
Ed Monk, Associate Director at Fidelity International, argues that the UK economy has stalled, and that we may not be seeing the full impact of the UK’s supply chain crisis:
‘Growth of just 0.1% in July marks a significant slowdown and it’s a concern that most areas of the economy were flat across the month – only production showed a positive reading while services and manufacturing were flat, and construction fell. It now looks like the wait for the UK to regain the ground lost since the start of the pandemic will last well into next year.
‘What’s concerning is that these numbers may not yet be showing the full effect of sustained supply-chain bottlenecks. The problem spans multiple sectors, with concerns growing over shortages in manufacturing and construction materials… Speaking to MPs on the commons Treasury committee this week, Andrew Bailey confirmed supply-chain issues and a shortage of workers could see a ‘levelling off of the recovery’.’
However, other economists have argued that the slowing pace of growth may just be a blip in an otherwise upwards trend, with the 0.1% figure pulled down by the 1% expansion in June.
Despite this news, Sterling is currently posting modest gains against the Euro, though the upside is likely to be limited.
Euro (EUR) Subdued by ECB and Tremors of Political Turmoil
Meanwhile, the Euro is on the defensive after the European Central Bank’s (ECB) fairly dovish policy decision yesterday.
The central bank voted unanimously to slow the pace of its Pandemic Emergency Purchasing Programme (PEPP) rather than to actually taper bond-buying. While the distinction is subtle, it seems to have put downward pressure on the Euro by setting the ECB apart from the Federal Reserve and the Bank of England (BoE), which have both signalled intentions to wind down pandemic-era aid.
Germany’s finalised inflation figures this morning printed as expected, thereby doing little to support the single currency.
Year-on-year inflation rose to 3.9% – the highest level since 1993 – but this high figure is attributed to the low base effect caused by last year’s temporary reduction in VAT.
Meanwhile, an asymmetrical recovery in the Eurozone and political dissonance may also be denting EUR investors’ confidence.
Former European Commissioner and current French presidential candidate Michel Barnier has expressed his anti-EU stance. A quote attributed to Barnier – and subsequently retweeted by him – proposed a referendum to ‘regain’ legal sovereignty over immigration rules:
‘On immigration, we must regain our legal sovereignty to no longer be subject to the judgments of the CJEU or the ECHR. We will propose a referendum in September on the question of immigration’.
In addition, a dispute is breaking out between northern and eastern EU members on the one side and the European south on the other over loosening the bloc’s deficit rules.
The possibility of impending political turmoil in the EU may be causing hesitancy among some EUR investors.
Pound Euro Exchange Rate Forecast: GBP/EUR Could Remain Fairly Muted
With both currencies facing challenges today, we may see the Pound Euro exchange rate continue to waver in a narrow range.
However, if the current weakness in the US Dollar (USD) persists, the Euro could find some room to regain ground thanks to the negative correlation between USD and EUR.