Pound Euro (GBP/EUR) Exchange Rate Narrows amid Souring Market Mood

Pound Euro (GBP/EUR) Exchange Rate Narrows amid Souring Market Mood

(Article updated 16:55, 25/5/23) The Pound Euro (GBP/EUR) exchange rate is narrowing this afternoon. A sour market mood appears to be weighing heavily on the increasingly risk-sensitive Sterling.

However, as the US Dollar seems to be on the up, the downside could be limited due to the Euro’s negative correlation with the ‘Greenback’.

Trade is taking a downbeat turn as the US debt ceiling deadline creeps ever closer, bringing anxieties with it.

At the time of writing, GBP/EUR is trading at around €1.1491, falling from gains made over the session, but remaining flat against the morning rates.

Original article continues below:

Pound Euro Exchange Rate Rises amid German GDP Contraction

The Pound Euro exchange rate is strengthening this morning, following news that the German economy entered a technical recession.

At the time of writing, GBP/EUR is trading around €1.1533, rising by just under 0.3% from the morning’s opening rates.

Euro (EUR) Weakens amid News of German Technical Recession

The Euro (EUR) is weakening this morning, following a surprise downward revision in Q1 German GDP. Initially, this pointed to a stall in the economy which was unwelcome in the first place.

However, this morning the reading was revised to show a 0.3% contraction, meaning the German economy entered a technical recession. Because of this, EUR investors appear to be concerned over signs of faltering in the bloc’s largest economy.

Carsten Brzeski, Global Head of Macro at ING, commented:

‘A drop in purchasing power, thinned-out industrial order books as well as the impact of the most aggressive monetary policy tightening in decades, and the expected slowdown of the US economy all argue in favour of weak economic activity.’

However, an uptick in German consumer confidence may be cushioning the single currency. GfK found that consumer sentiment improved to -24.2 as we head into June.

Pound (GBP) Underpinned by Elevated Rate Hike Bets

The Pound (GBP) is being underpinned this morning by momentum from yesterday’s trade. However, it appears to be unable to gain further ground of its own accord.

Yesterday, the shock inflation print led to elevated interest rate hike bets. Markets are now seeing a rate hike in June as all but confirmed, with additional tightening beyond seeming possible.

Chris Turner, Global Head of Markets and Regional Head of Research for UK & CEE at ING, commented:

‘We’ll definitely have to see some softer wage/price data over the coming weeks for the Bank of England to be diverted from what looks like another 25bp hike on June 22nd.’

However, a lack of meaningful data releases and a sour market mood is preventing Sterling from continuing this momentum.

US debt ceiling negotiations are likely causing the downbeat mood, as the hard deadline for a default rapidly approaches. However, signs do appear to be positive, lending hope that a deal can be struck.

GBP/EUR Exchange Rate Forecast: UK Retail Recovery to Buoy GBP?

Looking ahead for the Pound, the core catalyst of movement is likely to come from tomorrow’s retail sales data. Economists are forecasting a sizeable improvement on a monthly basis, expecting a 0.3% increase over March’s 0.9% decrease.

If this prints accurately, GBP could strengthen amid signs that the UK’s vital retail sector is recovering.

Elsewhere, market sentiment may also drive Sterling. Due to its increasingly risk-sensitive nature, if the mood remains dour, GBP could struggle to capitalise on positive data.

For the Euro, data releases are relatively light as we move through to the end of the week’s session. However, European Central Bank (ECB) Chief Economist Philip Lane is due to speak tomorrow morning.

If Lane takes a hawkish stance, the Euro could rally amid indications of further interest rate hikes. If he takes a dovish view, however, EUR could weaken.

John Mulcahey

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