Pound Euro Exchange Rate Extends Upside despite UK Economy Concerns

Pound Euro Exchange Rate Continues Climb despite Headwinds

(Updated 16:50, 1/10/21) The Pound Euro (GBP/EUR) exchange rate has continued to make gains through today’s session, despite the UK’s fuel crisis continuing to cause disruption and growing concern over an ‘autumn storm’ for the UK economy (see original article below).

The upside in GBP/EUR comes as Eurozone inflation hit a 13-year high of 3.4% amid soaring energy prices.

The CPI has cause anxiety among EUR investors as the European Central Bank maintains its ultra-accommodative approach to monetary policy, and this seems to be pressuring the single currency today.

In addition, the Pound (GBP) may also be gaining from a prevailing risk-on market mood, as Sterling is seen as a riskier currency than the Euro (EUR).

Original article continues below:

Pound Euro Exchange Rate Edges Up as EA PMIs Revised Lower 

The Pound Euro (GBP/EUR) exchange rate is edging higher today after Eurozone data printed below expectations and supply constraints hit European manufacturers. 

The Pound (GBP), however, is still pressured by fuel shortages in the UK and the country’s wider supply chain crisis, with business leaders warning of an ‘autumn storm’ as multiple headwinds buffet the UK’s economic recovery. 

Pound (GBP) Inches Higher despite Slump in Business Morale 

The Pound is firming against the Euro (EUR) today, as a better-than-expected PMI and signs of fuel supplies stabilising are offset by warnings from business leaders that there are hard months ahead. 

Supporting Sterling, the UK’s final manufacturing PMI was revised slightly higher for September, printing at 57.1 versus 56.3. Despite being the weakest reading since February, the PMI still suggests strong expansion in the UK manufacturing sector, and by beating forecasts it could be fortifying GBP. 

However, Sterling’s upside may be tenuous as business confidence in the UK has plummeted, with business leaders warning of an ‘autumn storm’ in the coming months. 

Economic morale is down as a number of factors weigh on the UK’s recovery, including tax hikes, labour shortages, massive supply chain disruption, and soaring costs of materials, energy and wages. 

Kitty Ussher, Chief Economist at the Institute of Directors (IoD), said: 

‘The business environment has deteriorated dramatically in recent weeks. Following a period of optimism in the early summer, people running small and medium-sized businesses across the UK are now far less certain about the overall economic situation and the IoD Directors’ Economic Confidence Index fell off a cliff in September. 

‘A higher proportion of our members expect costs to rise in the next year than expect revenues to rise. This is not helped by the government’s recent decision to raise employers’ national insurance contributions, which acts as a disincentive to hire just when the furlough scheme is ending.’ 

In addition to the pressures on businesses, households also face higher taxes, rising energy bills, escalating prices and cuts to Universal Credit. 

These factors could cap Sterling’s gains today and perhaps begin to weigh on GBP as the session unfolds. 

Euro (EUR) Subdued as Supply Chain Issues Disrupt Manufacturing 

The Euro, meanwhile, is also facing challenges today as the European energy crisis and global supply chain issues hit countries on the continental mainland. 

This morning, Germany’s retail sales missed market estimates. In August, German domestic sales rose by 1.1%, below predictions of a 1.5% increase. The figure also comes after the previous month’s 4.5% slump in sales, suggesting that demand remains subdued. 

Additionally, the final September IHS Markit manufacturing PMIs for Germany and the Eurozone were revised down by 0.1 point each. 

Chris Williamson, Chief Business Economist at IHS Markit, commented on the disruption manufacturers face: 

‘Supply issues continue to wreak havoc across large swathes of European manufacturing, with delays and shortages being reported at rates not witnessed in almost a quarter of a century and showing no signs of any imminent improvement. 

‘Growing supply and transport issues are not only being cited as a major constraint on both production and demand, but also once again drove prices sharply higher in September. 

‘Factory jobs growth has meanwhile also slowed partly due to lower labour requirements amid the widespread component shortages.’ 

With these supply chain woes hitting the Eurozone, it is losing ground against the Pound today. 

In addition, the Eurozone’s inflation rate hit 3.4%, above expectations of 3.3%. With the European Central Bank (ECB) not expected to raise interest rates until 2024, this may increase concerns about inflation overheating. 

Pound Euro Exchange Rate Forecast: GBP/EUR Could Waver Today 

As the day progresses, we may see the Pound Euro pair waver as both sides face significant headwinds. 

Although the Eurozone PMIs were revised lower and the UK PMI was revised higher, UK factory growth is still slower than that in the Euro area. Once the initial surprises are digested by the market, this could begin to support the Euro. 

Samuel Birnie

Contact Samuel Birnie