Pound Euro Exchange Rate on the Defensive as German Inflation Soars to 5.3%

Pound Euro Exchange Rate Remains Offered Following German Inflation Release 

(Updated 14:55, 6/1/22) The Pound Euro (GBP/EUR) exchange rate remained on the defensive this afternoon, with Sterling’s attempts to rally being rebuffed in the wake of Germany’s latest inflation release

Germany’s headline figures reported inflation unexpectedly accelerated from 5.2% to 5.3% last month, rather than dipping to 5.1% as most economists forecast. 

This would appear to pour some doubt on the European Central Bank’s (ECB) stance that the recent spike in inflation within the Eurozone is temporary and may be seen by EUR investors as piling more pressure on the bank to rethink its monetary policy in 2022. 

At the same time, the Pound is drawing some modest support from ongoing speculation the Bank of England (BoE) could hike interest rates next month

Original article continues below:

Pound Euro Exchange Rate Dented by Upbeat German Data 

The Pound Euro (GBP/EUR) exchange rate opens today’s session on the back foot, following the release of some stronger-than-expected German manufacturing data. 

At the time of writing the Pound Euro exchange rate is trading at around €1.1955, down roughly 0.2% from this morning’s opening levels. 

Euro (EUR) Buoyed by Strong German Factory Orders 

The Euro (EUR) is on the front foot against the Pound (GBP) this morning, after Germany’s latest factor order figures printed above expectations. 

Germany’s federal statistics agency reported order growth surged from an upwardly revised –5.8% to 3.7% in November, easily surpassing forecasts for a more modest 2.1% expansion of orders. 

The stronger-than-expected rebound in factory orders was driven by demand from abroad, which helped to offset weak domestic orders. 

While the release was welcomed by EUR investors, the Euro’s gains were tempered somewhat as November’s release continued to highlight the threat posed to Germany’s industrial sector from persistent supply chain constraints as well as soaring energy prices.  

Pound (GBP) Subdued as PMI Releases Confirms Dramatic Slowing of Service Sector Growth 

At the same time, the Pound (GBP) is struggling to hold its ground this morning, following the publication of the UK’s latest services PMI. 

According to data published by IHS Markit, December’s finalised index printed at 53.6, slight beating the preliminary reading of 53.2, but sharply down from the 58.5 recorded in November. 

Unsurprisingly the slowdown was driven by the surge in Omicron Covid cases at the time, and the major impact this had on consumer confidence. 

Tim Moore, Economics Director at IHS Markit, commented: 

‘December data revealed a severe loss of momentum for the UK economy as many customer-facing businesses experienced a drop in demand due to escalating COVID-19 cases. Survey respondents also noted that renewed pandemic restrictions had slowed the recovery in business services.’ 

Elsewhere the Pound Euro exchange rate is also being suppressed by renewed Brexit uncertainty this morning as the UK and France clash over immigration. 

Pound Euro Exchange Rate Forecast: German Inflation in the Spotlight  

Looking ahead, the publication of Germany’s latest inflation estimate could infuse fresh volatility into the Pound Euro (GBP/EUR) exchange rate later this afternoon. 

Economists forecast German inflation will have slowed from 5.2% to 5.1% in December. 

While this would only be a modest slowing, it might suggest that inflation may have peaked in November. This would support the European Central Bank’s (ECB) stance that the recent spike in inflation in the Eurozone is ‘transitory’, further relieving pressure on the bank to start tightening its monetary policy. 

Meanwhile, in the absence of any notable GBP data, the direction of the Pound may be determined by domestic Covid developments.  Will elevated case numbers continue to raise concerns over Boris Johnson’s plans to ‘ride out’ the Omicron wave

Matthew Andrews

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