Pound Euro (GBP/EUR) Exchange Rate Rises amid Hopes for Milder UK Recession
(Updated 15:40, 24/11/22) The Pound Euro (GBP/EUR) exchange rate strengthened today, reaching its highest level since the Bank of England (BoE) forecast a ‘prolonged’ recession at its meeting on 3 November.
The upside in the Pound (GBP) came as GBP investors grew hopeful that the UK’s recession would be milder than initially feared.
Recent British economic data, including yesterday’s PMI reports, have often printed better than economists’ forecasts. In addition, the government’s pivot to tighter fiscal policy has helped to stabilise and reassure markets.
Furthermore, expectations that the Federal Reserve will opt for a slower pace of interest rate rises moving forward is also boosting Sterling. Less aggressive policy tightening from the Fed will likely mean a less severe UK recession. Lower interest rates also take some pressure off the UK public finances, with government borrowing costs continuing to fall.
Meanwhile, the Euro (EUR) resisted steeper losses thanks to fairly upbeat German data this morning. The single currency’s negative correlation with a weaker US Dollar (USD) may have also cushioned EUR’s downside.
However, the Euro was unable to regain any ground against the Pound after the European Central Bank’s (ECB) latest meeting minutes revealed fears of a looming recession. With policymakers concerned about an economic downturn, they may opt for a slower pace of rate hikes.
Reading between the lines of the ECB minutes, there seem to be growing recession concerns, which could lead to a pause in the hiking cycle in the coming months, says @carstenbrzeskihttps://t.co/RXykwo8OoI
— ING Economics (@ING_Economics) November 24, 2022
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Pound Euro (GBP/EUR) Exchange Rate Rangebound amid Risk-On Mood and Positive German Data
The Pound Euro (GBP/EUR) exchange rate is wobbling this morning as both currencies find some support. Looking ahead, the European Central Bank (ECB) meeting minutes are in the spotlight.
At the time of writing, GBP/EUR is trading at around €1.1585, virtually unchanged from the start of the European session.
Pound (GBP) Buoyed by Risk-On Mood
The Pound (GBP) is attracting some support today as markets remain upbeat, thereby boosting the appeal of the increasingly risk-sensitive UK currency against the safer Euro (EUR).
Investors are cheering yesterday’s worse-than-forecast US PMI surveys, which saw service sector activity drop to a three-month low and manufacturing hit a thirty-month low.
This dire data was followed by the Federal Open Market Committee (FOMC) meeting minutes, which showed that most Fed policymakers favour a slower pace of interest rate rises as inflation eases and the US economy shows signs of cooling.
This in turn is cheering markets, as smaller rate rises from the world’s largest central bank will mean less pressure on other economies.
However, GBP is struggling to hold gains against the Euro, in part due to headlines about new strikes across the UK. Royal Mail workers will not be working today or tomorrow (Black Friday) or on many key dates leading up to Christmas, after rejecting a pay deal.
School teachers and university lecturers are also on strike today, with the UK facing a winter of discontent as workers who have seen pay freezes in recent years demand more money amid the current cost-of-living crisis.
Further disruption is expected as the RMT Union yesterday announced plans for four 48-hour walkouts over December and January.
Euro (EUR) Shored Up by Brighter German Data
Meanwhile, the Euro is resisting losses against the Pound, despite the risk-on market mood, thanks to better-than-expected German data.
Germany’s Ifo business climate indicator rose from 84.5 to 86.3 this month, beating forecasts of 85.
Although satisfaction with current conditions was worse than anticipated, businesses in Europe’s largest economy are far less pessimistic about the coming months.
Carsten Brzeski, Global Head of Macro at ING, commented:
‘These hopes are built on the back of several government stimulus packages, filled national gas reserves, a better and faster adaption of businesses and households to reduce gas consumption, and hopes that consumers will simply spend away the energy crisis.’
However, despite these hopes, downside risks remain. As a result, the Euro has so far been unable to rise against the Pound.
Pound Euro Exchange Rate Forecast: Central Bank Expectations in Focus
Looking ahead, the European Central Bank monetary policy meeting accounts are in focus.
The bank raised interest rates by 75bps at its last meeting as it scrabbles to bring inflation down before the Eurozone enters a recession. Today’s minutes should give an indication of what policymakers have planned for the next rate decision. If they signal that the pace of rate hikes could slow, the single currency could drop.
Turning to Sterling, later this morning we have the Confederation of British Industry’s (CBI) latest industrial trends orders. An expected steeper decline in new orders could dent GBP.
In the afternoon, Bank of England (BoE) policymaker Catherine Mann is due to speak. As a more hawkish member of the bank’s Monetary Policy Committee (MPC), Mann could trigger a fall in Sterling if she advocates a slower pace of policy tightening.