Pound Euro (GBP/EUR) Exchange Rate Fluctuates as Germany Fell into Q1 Recession

Pound Euro (GBP/EUR) Wavers on Downbeat Germany GDP Growth

(Updated 25/5/23, 08:30)

The Pound Euro (GBP/EUR) exchange rate is wavering this morning as the latest GDP growth figures showed Germany fell into a recession. GDP growth data for Q1 showed Europe’s largest economy slip into a winter recession.

At time of writing, the GBP/EUR exchange rate is around €1.1513, relatively unchanged from this morning’s opening levels.

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GBP/EUR Falls Despite Elevated BoE Rate Hike Expectations

(Updated 24/5/23, 16:50)

The Pound Euro exchange rate is dropping this afternoon despite hotter-than-expected UK inflation. Uncertainty surrounding the Bank of England’s (BoE) monetary policy could be dragging on Sterling. Whereas an increasingly hawkish European Central Bank (ECB) is providing support to the Euro.

At time of writing, the GBP/EUR exchange rate is around €1.1494, a 0.30% fall from this morning’s opening levels.

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GBP/EUR Fluctuates as Inflation Drops Less than Expected

The Pound Euro exchange rate is trading narrowly after inflation in the UK falls to 8.7%, the sharpest decline since the cost-of-living crisis began.

At time of writing, the GBP/EUR exchange rate is around €1.1527, relatively unchanged from this morning’s opening levels.

Pound (GBP) Supported by Hotter-than-Expected Inflation

The Pound (GBP) struggled for increased demand this morning in the wake of stronger-than-expected inflation. Against expectations of a cooling to 8.2%, headline CPI printed at 8.7%, marking the sharpest decline in inflation since the living cost crisis began.

The Office for National Statistics (ONS) reported that inflation had fallen below double digits for the first time since August of last year. Falling energy prices contributed to the sharp decline, however this was largely offset by soaring food prices. In the 12 months to April, food and non-alcoholic drink prices surged by 19%.

Despite the fall in headline CPI, food prices continue to climb at the quickest pace in 45 years. Grant Fitzner, ONS Chief Economist, commented on the latest data:

‘Prices in general remain substantially higher than they were this time last year, with annual food price inflation near historic highs.’

Providing some modest support to Sterling, however, are reinforced expectations of further tightening from the BoE. Despite a drastic fall in inflation, the rate remains far above the central bank’s target of 2%. Expectations of the central bank continuing their aggressive rate hike cycle have buoyed GBP investors. James Smith, Developed Markets Economist at ING, said:

‘UK inflation has come in higher than pretty much anyone, including members of the Bank of England’s committee, expected in April.

‘This undoubtedly makes life harder for policymakers and no doubt raises the chance of yet another 25bp rate hike in June.’

Euro (EUR) Undermined by Declining Business Climate

Meanwhile, the Euro (EUR) remains under pressure this morning amid a lack of major economic data. The latest Ifo business climate indicator for Germany fell for the first time since October 2022. Fewer new orders and a considerable deterioration in industry expectations have weighed on Europe’s largest economy.

Further weighing on the Euro is that the IFO are expecting the German economy to head towards stagnation in Q2. Klaus Wohlrabe, IFO’s Economist, said of the latest data:

‘(The) German economy is treading water. Strong collapse in expectations in industry is striking, (and) industry export expectations have fallen markedly.’

Providing the Euro with modest support, and limiting any further gains, are elevated rate hike expectations from the ECB. Hawkish rhetoric from the central bank has buoyed investors as the ECB remains committed to bringing inflation down.

Pound Euro Exchange Rate Forecast: BoE Speech to Rally the Pound?

Looking ahead, the Pound Euro exchange rate could see further movement with a speech from BoE Governor Andrew Bailey this morning. In light of the latest data, Bailey could give further hints that the central bank still has a long way to go to bring inflation down.

Meanwhile, the Euro could also strengthen on a speech from ECB President Christine Lagarde. If she reiterates previous hawkish comments, the Euro could climb on increased rate hike bets.

Danny Tingle

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