Pound Euro (GBP/EUR) Exchange Rate Extends Upside on Public Borrowing Figures

Pound Euro (GBP/EUR) Exchange Rate Firms as EUR Investors Unimpressed by German Data

(Updated 15:30, 25/1/22) The Pound Euro (GBP/EUR) exchange rate has continued to zigzag higher this afternoon. At the time of writing, GBP/EUR is trading at €1.195, up 0.25% from today’s opening level. The pair has almost recovered yesterday’s losses.

Germany’s better-than-expected Ifo business climate report this morning failed to lift the Euro (EUR). Although it beat forecasts, the gauge remained at its second lowest level since February.

The data also came with caveats. Economists have warned that, despite the slight increase in morale, Europe’s largest economy is likely to have contracted in the fourth quarter of 2021. Carsten Brzeski, Global Head of Macro at ING, commented:

‘The German economy went into hibernation at the turn of the year. When the first official estimates are released on Friday, it will require a small miracle for them not to show a contraction in the economy in the final quarter of 2021. And despite today’s improvement in sentiment, the risk of Germany being in an outright recession has not disappeared.’

The Pound (GBP), meanwhile, has so far managed to shrug off the International Monetary Fund’s (IMF) downwardly revised growth projections. In an update to the its World Economic Outlook, the IMF cut its UK growth forecast for 2022 from 5% to 4.7%.

The downgrade came following the emergence of Omicron, which put a dent in the UK’s economic recovery. However, as the IMF also downgraded forecasts for the EU and the US, Sterling was spared.

Original article continues below:

Pound Euro (GBP/EUR) Exchange Rate Rising as UK Borrowing Below Forecasts

The Pound Euro (GBP/EUR) exchange rate is edging higher this morning as public sector borrowing came in below forecasts.

Meanwhile, the Euro (EUR) is somewhat subdued as a rising US Dollar (USD) puts pressure on the single currency.

Pound (GBP) Firms as Public Finances Fared Better in December

The Pound (GBP) has risen this morning as the UK’s public sector finances are in a better condition than economists had expected.

Public sector net borrowing came in at £16.8bn last month. Although this was the fourth-highest December borrowing on record, it was below market forecasts of £18.5bn.

The figures suggest that the overall economic impact of Omicron wasn’t as bad as many had feared. Richard Carter, Head of Fixed Interest Research at Quilter Cheviot, explains:

‘As the impact of Omicron was not as bad as had been expected, growth was less negatively impacted than anticipated. This in turn increased the government’s tax take, therefore reducing the need to borrow, and resulted in a better debt to GDP ratio than might have been expected – 96.0% of GDP, 0.1% lower than in November 2021.

‘These figures could have been worse, but the Omicron variant proved less impactful than many had initially feared. While the government did opt to move to its ‘Plan B’, the UK avoided major public health restrictions such as lockdowns and we have since returned to ‘Plan A’.’

Public sector borrowing over the first nine months of the financial year is £13bn lower than the Office for Budget Responsibility’s (OBR) October forecast. James Smith, Research Director at the Resolution Foundation, says that Rishi Sunak now has more headroom to tackle the cost-of-living crisis:

‘This fiscal room for manoeuvre makes it inevitable that the Chancellor will set out a plan to deal with the cost of living crunch.

‘With soaring energy bills set to push around six [million] families into fuel stress, a targeted package to limit the rise in energy bills is the top priority’.

However, with inflation surging higher, debt interest payments hit a six-month high.

This could be holding GBP back this morning.

Euro (EUR) Muted amid USD Strength

Meanwhile, the Euro faced some selling pressure as the European session opened. Strength in the US Dollar may have contributed to the downside, due to the negative correlation between EUR and USD.

In addition, EUR investors have started to exercise caution ahead of the Federal Reserve’s policy decision tomorrow evening. Though the Fed is unlikely to raise rates at this meeting, economists expect a strong signal that the US central bank will begin hiking in March.

Pound Euro Exchange Rate Forecast: German Data to Support EUR?

As the morning unfolds, Germany’s latest Ifo business climate indicator could begin to support the Euro. The indicator beat expectations, rising from 94.7 to 95.7. This was the first rise since May 2021. Following a better-than-expected PMI yesterday, some may take it as a tentative sign that things are improving in Europe’s largest economy. However, the rise itself is marginal so any effect could be small.

As for the Pound, the latest Confederation of British Industry (CBI) data is out later this morning. Markets expect the business optimism index for the first quarter of this year to edge up, which might add to the Pound’s upside.

GBP investors will also be keeping an eye on British political news. New ‘partygate’ revelations continue to hit the headlines as the country awaits Sue Gray’s official inquiry into the scandal.

Finally, risk appetite may also affect the Pound Euro pair. As EUR is a safe-haven currency and investors see GBP as a riskier asset, swings in market mood could drive movement in GBP/EUR.

Samuel Birnie

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