Pound Euro Exchange Rate Wavers on UK GDP and EU Political Tensions

Pound Euro (GBP/EUR) Exchange Rate Fluctuates amid Headwinds for Both Sides

(Updated 16:00, 11/11/21) The Pound Euro (GBP/EUR) exchange rate has wavered today, as headwinds for the Euro (EUR) offset the UK’s slowdown in GDP.

Political tensions between the EU and Belarus are bubbling over as Brussels prepares to hit Minsk with fresh sanctions. In recent days, thousands of migrants have gathered on the Belarus-Poland border.

The EU says that Belarus has lured migrants there by promising them easy access into Europe in an attempt to destabilise the bloc. In response, Brussels is preparing to impose new sanctions on Belarus.

The Belarusian president, Alexander Lukashenko, has suggested he would retaliate by cutting off gas supplies:

‘We are heating Europe, and they are threatening to close the border… What if we cut off gas to them? Therefore I recommend that the leaders of Poland, Lithuania and the other headless people think before speaking. We should not stop at anything to defend our sovereignty and independence.’

The threat comes as Europe faces an energy crisis in the run-up to winter. Gas prices have surged as the global economy recovers from the pandemic, causing some factories to halt operations.

It looks unlikely that the EU will back down. Belarus, on the other hand, will probably require approval from Russia. As Thierry Bros, a professor at Sciences Po Paris and former oil and gas advisor, explains:

‘[Russia and Gazprom] control the transit through Belarus and if Lukashenko was to try and cut supplies, they have significant leverage over his regime and the option of rerouting gas supplies. The key question is therefore whether Vladimir Putin supports Belarus in this threat.’

These tensions seem to be weighing on the single currency today. However, the UK’s slowdown in GDP growth (see main article below) is exerting as much, if not more, downward pressure on the Pound (GBP).

The Pound Euro exchange rate has fluctuated between €1.16654 and €1.17008 today. It is currently trading at around €1.167, down almost 0.2% from this morning’s opening level.

Original article continues below:

Pound Euro (GBP/EUR) Exchange Rate Wavers as UK Growth Slows and US Dollar (USD) Soars 

The Pound Euro (GBP/EUR) exchange rate has wavered this morning, trending lower overall, as the UK’s latest GDP figures indicate a significant slowdown in growth. 

Meanwhile, the Euro (EUR) is under pressure from its negative correlation to a soaring US Dollar (USD). Following yesterday’s US CPI, USD has hit multi-month highs today. 

Pound (GBP) Slips amid Stalling UK Recovery 

The Pound (GBP) has slipped this morning after the release of the UK’s latest GDP figures. 

The UK’s economic recovery slowed significantly in the third quarter of this year. The GDP growth rate printed at 1.3% – down from 5.5% the previous quarter and below forecasts of 1.5%. Despite a rapid recovery over late spring and early summer, national output still remains 2.1% below its pre-pandemic level and 5% below its pre-pandemic trend. 

Staff shortages, supply chain constraints and rising infection rates all stifled economic growth, despite the easing of lockdown restrictions in July. 

Month-on-month growth initially seems more positive. GDP grew by 0.6% in September, following a 0.2% rise in August and a 0.2% contraction in July. September’s recovery was driven by the services sector, while a rebound in construction activity also boosted growth. 

However, 0.5 percentage points of the 0.6% monthly growth came from the health sector, mostly due to the return of face-to-face GP appointments. In addition, business investment printed at 0.4%, missing forecasts of 2.6% and remaining well below pre-pandemic levels. 

The National Institute of Economic and Social Research (NIESR) argues that the post-Covid rebound is almost over, and that growth may slow further in the fourth quarter. James Smith, Developed Markets Economist at ING, agrees: 

‘[W]e expect growth momentum to remain slow into the fourth quarter. We expect the monthly readings to average around 0.1-0.2% for the next few months, and we think the fourth quarter will record growth in the region of 1% and potentially below.’ 

This latest data shows that the UK is lagging behind its G7 counterparts when it comes to GDP growth. 

Euro (EUR) Capped by USD Strength 

The Euro (EUR), meanwhile, is struggling to press the advantage this morning due to its negative correlation with the US Dollar. 

After US inflation printed at a 30-year high of 6.2% yesterday, the US Dollar has surged. USD/EUR is at a 16-month high and USD/GBP is at an 11-month high, and this strength in the US Dollar is straining the single currency. 

Nevertheless, the Euro has managed to gain against a weaker Pound this morning. 

Pound Euro Exchange Rate Forecast: GBP/EUR to Continue Trending Down? 

Looking ahead, we could see the Pound Euro pair continue on its current trajectory today as there are no more significant data releases. 

At the time of writing, analyses of the UK’s GDP figures continue to come in. Sterling could carry on losing ground if the narrative is unfavourable. 

Tomorrow brings the Eurozone’s latest industrial production report. Economists expect output to have contracted again in September by 0.5%. This could dent the single currency, perhaps helping the Pound Euro exchange rate to recoup some losses. 

GBP investors could be looking to a speech from Jonathan Haskel of the Bank of England (BoE) for fresh impetus. However, as one of the more dovish members of the bank’s Monetary Policy Committee (MPC), Haskel may not offer Sterling much support. 

Samuel Birnie

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