Pound Euro (GBP/EUR) Exchange Rate Sees Some Turbulence as UK GDP Comes with Caveats
(Updated 15:30, 13/10/21) The Pound Euro (GBP/EUR) exchange rate has experienced some turbulence today as markets fully digested the UK’s GDP results.
After hitting €1.17988 this morning, GBP/EUR then dropped down 0.2% to €1.17748. It’s currently back up to around €1.1785, virtually unchanged from this morning’s opening levels.
Although the GDP report initially gave Sterling a boost, subsequent commentary from analysts may have dampened the Pound’s (GB) appeal.
The National Institute of Economic and Social Research (NIESR), a respected economic think tank, is now forecasting 1.5% GDP growth in the third quarter of this year and 0.8% in the fourth quarter, indicating a significant slowdown in the UK economy.
If the NIESR’s prediction is correct, third-quarter growth would be well below the Bank of England’s (BoE) expectation last month of 2.1%, which in turn was downgraded from the August report’s forecast of 2.9% growth in the third quarter of 2021.
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Pound Euro (GBP/EUR) Exchange Rate Firms on UK GDP and Central Bank Policy
The Pound Euro (GBP/EUR) exchange rate is strengthening today, after the UK’s GDP data for August revealed a recovery from July’s disappointing results.
Meanwhile, the Euro (EUR) is suffering from the divergent approaches to policy from the European Central Bank (ECB) and the Bank of England (BoE), with the BoE’s hawkishness benefitting the Pound (GBP).
Pound (GBP) Firms on Positive GDP
While this is less than the 0.5% growth economists had expected, it represents a notable recovery from July’s 0.1% contraction, which was revised down from a previous estimate of 0.1% growth.
GDP in the service sector increased by 0.3% following a drop of 0.1% in July, while manufacturing grew by 0.5%, bouncing back from July’s 0.6% decline.
In addition, UK industrial production for August printed at 0.8%, well above expectations of a 0.2% rise.
Paul Dales, Chief UK Economist at Capital Economics, commented on the results:
‘The improvement in August probably had a lot to do with the fading of the restraint from July’s “pingdemic”, which at one point meant more than 1m people were self-isolating.’
Yet despite the pick-up in economic growth, the UK economy is still 0.8% below pre-pandemic levels, and some analysts fear that growth may have stagnated since August due to the fuel crisis, price rises and labour shortages.
As such, the Pound Euro exchange rate is gaining so far today but the upside may be limited.
Euro (EUR) Subdued on ECB Dovishness
The Euro has dropped against the Pound today, despite the finalised German CPI confirming that inflation is at a 28-year high of 4.1%.
A key factor favouring the Pound Euro pair is the diverging policy approaches of the ECB and the BoE.
In recent weeks, City traders have brought forward their forecasts for a BoE rate hike, with some analysts expecting the bank to raise interest rates as early as December.
Meanwhile, the ECB has remained committed to its dovish approach. On Tuesday, ECB policymaker Francois Villeroy de Galhau said that there is a risk of Europe falling short of its 2023 inflation target rather than exceeding it, adding that ending the bank’s Pandemic Emergency Purchasing Programme (PEPP) would not mean the end of accommodative monetary policy.
In addition, the ECB’s Chief Economist Philip Lane reiterated the central bank’s cautious approach on Monday, saying:
‘We need to be much less trigger happy, we need to wait for data… The medium-term inflation dynamic is too slow, not too fast.’
These differing approaches to policy are favouring the Pound today.
GBP/EUR Exchange Rate Forecast: Brexit Tensions Could Affect Sterling
Looking ahead, the Eurozone’s industrial production figures – just released at the time of writing – contracted by 1.6%, as expected. This could cause the Pound Euro exchange rate to strengthen further as markets digest the data.
Brexit concerns could also affect the GBP/EUR pair. Tensions are rising over fishing rights, with 14 EU member states issuing a joint warning to the British government over their access to coastal waters.
Meanwhile, the EU is expected to extend an olive branch to Britain today over the Northern Ireland protocol, offering to scrap up to 50% of custom checks on goods. How the UK responds to this offer could significantly influence the Pound Euro rate, as the Northern Ireland protocol has triggered sharp movement in the pair on many occasions this year.