Pound Euro Exchange Rate Extends Downturn as EU GDP Impresses
(Updated 16:30, 08/06/2022) The Pound Euro (GBP/EUR) exchange rate slumped late this morning following the release of the Euro area’s GDP statistics. Contrary to earlier estimates, the EU economy expanded by 0.6% in Q1 2022 – double the amount forecast. Annual GDP printed at 5.4%, also exceeding earlier estimates.
According to Eurostat, net trade and inventories were the main drivers of the unexpected uptick, as exports increased by 0.4% as imports fell. The agency said its earlier estimates were based on a more limited data set and on preliminary estimates from EU governments which have since been revised by national statistics offices.
Today’s release is particularly impressive given the Russian invasion of Ukraine on 24 February: an event which disrupted supply chains, hit confidence and caused energy prices to soar.
Considering the data, analysts at Reuters observe that ‘the negative impact of the war is [now] expected to be felt in the second quarter.’
Also buoying Euro sentiment was upwardly-revised employment data, which revealed that employment growth in the first quarter was 0.6% quarter on quarter and 2.9% on the year, rather than 0.5% and 2.6% respectively.
Meanwhile, Sterling continued to struggle, a lack of support stemming from bearish trading sentiment and ongoing disputes in Parliament. UK Prime Minister Boris Johnson has faced repeated calls today from high-profile conservative MPs to cut taxes in order to alleviate cost-of-living pressures.
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GBP/EUR Exchange Rate Trends Lower on Receding Risk Appetite
The Pound Euro (GBP/EUR) exchange rate is dipping this morning as both the Pound (GBP) and the Euro (EUR) struggle to attract support amidst intermittent risk-off headwinds. Meanwhile, Euro investors look ahead to the third estimate of Q1’s GDP growth, which is forecast to print at 0.3%.
At the time of writing, GBP/EUR is trading at €1.1724, 0.4% down from today’s opening levels.
Euro (EUR) Trades Mixed on Alternating Risk Appetite
The Euro is losing momentum against several of its peers this morning, following a multi-week recovery on the back of a relatively hawkish European Central Bank (ECB).
Into today, the single currency remains at the mercy of US Dollar (USD) dynamics, geopolitical concerns and the Federal Reserve-ECB divergence. Unsteady risk appetite weighs upon the risk-sensitive currency, while weaker-than-expected German data dents EUR support.
German industrial production edged 0.7% higher in April rather than 1% as predicted: year-on-year, industrial output dropped 2.2% as pandemic restrictions and the war in Ukraine disrupted supply chains.
According to the Federal Statistical Office of Germany:
‘The results of month-on-month, quarter-on-quarter and year-on-year comparisons may differ considerably at present because of the Covid-19 crisis… Russia’s attack on Ukraine and the related sanctions have an impact on many parts of the economy and society.’
Later today, the third estimate of the Q1 GDP growth rate is expected to remain unchanged at 0.3%, indicating slowing growth in the European economy. Such a prospect raises concerns that if policy tightening measures are enacted to target inflation, an economic recession may be triggered.
Pound (GBP) Subdued by ‘Levelling-Up’ Concerns Amidst Lack of Significant Data
The Pound (GBP) has fallen against several rival currencies this morning as a lack of significant UK data exposes it to losses. Intermittent risk-off headwinds dampen Sterling support alongside concerns that the UK economy is struggling to ‘level up’.
Recent reports show that London’s economic recovery is outpacing that of other UK regions: the Office for National Statistics (ONS) revealed that London’s GDP rose by 1.2% in January-March 2022, much faster than the UK-wide average.
Meanwhile, Northern Ireland demonstrates the slowest GDP growth across the UK, at 0.4%, while the North East, Yorkshire and the Humber, and the South West all matched the average of 0.8%.
Given the uneven recovery across the country, the World Bank has slashed its growth forecasts and warns of a risk of stagflation. Supporting such a hypothesis is a slowing UK services sector and petrol prices once again peaking at new highs.
David Malpass, the Bank’s president, comments:
‘The war in Ukraine, lockdowns in China, supply chain disruptions and the risk of stagflation are hammering growth. For many countries, recession will be hard to avoid.’
Pound Euro Exchange Rate Forecast: EU GDP, External Factors to Affect Trading?
Looking ahead, the Pound Euro exchange rate may recoup some of this morning’s losses, as economic growth in the Euro area is expected to remain unchanged in Q1 compared with Q4 2021.
On the other hand, markets may have already priced in such an outcome, given that today’s data is the third GDP estimate.
Elsewhere, GBP/EUR could be affected by external developments such as UK politics and the war in Ukraine. The conservative party remains divided today as several high-profile MPs demand urgent tax cuts to ease the cost-of-living crisis.