Pound Euro (GBP/EUR) Exchange Rate Trades Sideways following Poor Eurozone Data
(Updated 16:30, 05/11/21) After initially slipping this morning, the Pound Euro (GBP/EUR) exchange rate has bounced back to today’s opening levels. The movement comes as the single currency was unable press its advantage due to disappointing Eurozone data.
German industrial production contracted by 1.1% in September, though economists expected it to rise by 1%. Below-forecast data from Germany has become a trend in recent weeks as Europe’s largest economy is hammered by supply chain disruption and soaring costs.
In addition, retail sales in the Eurozone also unexpectedly contracted in September, falling 0.3%. Domestic sales were hit by consumer caution amid rising prices and coronavirus cases.
There may also have been a push-back by GBP bulls. While the Bank of England (BoE) didn’t raise rates this month, the British central bank is still likely to tighten policy before its European counterpart, so we may see Sterling recover in the medium-term.
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Pound Euro (GBP/EUR) Exchange Rate Continues to Tumble after BoE Leaves Bank Rate Unchanged
The Pound Euro (GBP/EUR) exchange rate has continued to tumble today after the Bank of England’s (BoE) decision to leave rates unchanged yesterday saw Sterling plummet to a five-week low against the single currency.
However, the single currency’s gains may be held back somewhat by a stronger US Dollar (USD) and weak Eurozone data.
Pound (GBP) Suffers Further Losses as Markets Digest BoE Decision
The aggressive sell-off in the Pound (GBP) has resumed this morning, as markets continue to react to the BoE’s decision to maintain the Bank Rate at a historic low of 0.1%.
While economists were split over which way the bank would vote, City traders were certain that a rate hike was coming. Three key BoE policymakers, including Governor Andrew Bailey, had hinted at a coming tightening of monetary policy in the run-up to the event. Governor Bailey in particular did not push back on rate hike rumours (unlike his counterparts in Europe and Australia).
As such, the decision came as a shock to markets. The Pound Euro exchange rate plummeted by over 1% in yesterday’s European session and continues to fall today.
Markets are now digesting the bank’s forward guidance. The BoE predicts that inflation will hit 5% early next year – the highest in a decade. Meanwhile, wages after tax will lag behind for the next two years, adding to the current cost-of-living squeeze.
The central bank also trimmed its growth forecasts. It now expects GDP to grow by a slightly smaller 7% this year, while next year’s projection has been cut from 6% to 5%. Growth will then lose momentum in 2023 and 2024, slowing to 1.5% and 1%, respectively.
In addition, the slump in Sterling will see import costs rise. This in turn will add to inflationary pressures, points out economist Huw Dixon:
As markets continue to reel from the decision, the Pound Euro exchange rate is extending its downside.
Euro (EUR) Surges as Central Bank Policy Gap Narrows
Meanwhile, the Euro (EUR) is rising sharply against the Pound today, as the narrowing of the policy gap between the European Central Bank (ECB) and its British counterpart supports the single currency.
In recent weeks, the Euro has suffered from the apparent divergence of policy between the ECB and the BoE. While markets expected the BoE to raise rates this month, the ECB has repeatedly pushed back against rate-hike expectations, forecasting a rise no earlier than 2024.
But the BoE decision has, at least temporarily, narrowed the gap between the two central banks’ approaches to policy. This has removed a key headwind for the Euro, particularly against the Pound, giving it space to climb.
However, EUR’s gains may be held back somewhat by its negative correlation to the safe-haven US Dollar, which is strengthening this morning amid a souring market mood.
Also capping EUR’s gains are some disappointing reports from the Eurozone. German industrial production and Eurozone retail sales both unexpectedly contracted in September.
Pound Euro Exchange Rate Forecast: US Non-Farm Payrolls to Cap EUR?
We could see the Pound Euro exchange rate continue to fall today as markets take time to readjust.
However, the US non-farm payrolls data is due out this afternoon, and economists expect a strong result. If the US Dollar strengthens further then the added pressure on the Euro could put a lid on its gains or even see it lose some ground.