Pound Euro (GBP/EUR) Exchange Rate Sinks on Fall in UK GDP

GBP/EUR Exchange Rate Softens Following UK GDP Release

The Pound Euro (GBP/EUR) exchange rate is weakening this morning as economic growth in the UK economy has fallen. UK GDP printed at -0.6% for June 2022, from a downwardly-revised 0.4% in May.

At the time of writing, GBP/EUR is trading at €1.1797, down 0.2% from today’s opening levels.

Pound (GBP) Trades Broadly Lower as UK Economy Shrinks

The Pound (GBP) is trending down against the majority of its peers this morning. This follows the release of monthly and quarterly GDP data, which reveals that the UK economy has shrunk – albeit by less than expected.

On a quarterly basis, UK GDP growth printed at -0.1% rather than the -0.2% forecast. This aligns with economists’ predictions that the economy would shrink temporarily before dipping into a prolonged recession in the final quarter of 2022.

James Smith at ING bank asserts that July’s GDP will likely trend up because of the ‘artificial’ comparison with the extra jubilee bank holiday but added that ‘a fall in fourth-quarter GDP now looks highly likely.’

On the other hand, analysts at the National Institute of Economic and Social Research (NIESR) speculate that the economy may already have entered a recession. The respected thinktank comments that it expects output to continue falling over the next three quarters.

This contrasts with the Bank of England (BoE)’s view – Derek Halpenny of MUFG bank summarises:

‘The BoE was forecasting a rebound in third-quarter GDP before we enter the five-quarter period of GDP contraction and today’s data doesn’t change that.’

Commenting on the reasons for the contraction, Halpenny cites a weakness in services while other analysts draw attention to a 1% decline in the retail sector, reflecting unprecedented pressures from inflation and global supply chain disruption.

Euro (EUR) Drops on Choppy Market Mood

The Euro (EUR) is falling against its peers today, dented by the return of risk-aversion in the market. Strength in the US Dollar (USD) also weighs upon EUR, given the currencies’ strong negative correlation.

Yesterday’s US PPI data initially dented ‘Greenback’ appeal, but USD has recovered some of its losses this morning.

Downbeat rhetoric from the German Economy Ministry could also be subduing the single currency, as today’s report concluded that the economy faces ‘significantly poorer prospects’ in the second half of the year.

The ministry blames reduced gas deliveries, increases in energy prices, supply chain issues and general uncertainty for the likely economic downtrend.

Elsewhere, the Euro area’s industrial production release has printed at 0.7% rather than 0.2% as expected, impressing economists. Production rose for capital goods and rebounded for energy versus a fall in May; however, the data seems insufficient to reverse EUR headwinds at the present.

GBP/EUR Exchange Rate Forecast: Pound to Slide Further on Risk-Off Headwinds?

Given a lack of further significant data for either the UK or Eurozone for the remainder of today’s session, GBP/EUR is likely to trade on external factors and risk sentiment.

Although Sterling has so far resisted a significant downside against the single currency due to a smaller-than-expected fall in GDP, persistent risk aversion is likely to weigh heavier upon GBP than the Euro. This is because EUR is a comparatively risk-off currency.

If market sentiment remains downbeat, Pound headwinds could escalate – pushing GBP/EUR lower.

Olivia Evershed

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