Pound Euro (GBP/EUR) Exchange Rate Fluctuates as Eurozone Economy Contracts
(Updated 8/6/23, 16:30)
The Pound Euro (GBP/EUR) exchange rate is trading narrowly as the latest estimate for economic growth in the Eurozone was revised downwardly. The Euro area economy unexpectedly contracted 0.1% in the first quarter of 2023, weighing on the Euro.
Analysts at Oxford Economics, in a note to investors, warned of the largest contraction on record, not including the pandemic:
‘Going forward, growth will remain soft despite dropping wholesale energy prices, as monetary policy tightening dents investment and still-present inflationary pressures constrain consumption.’
At time of writing the GBP/EUR exchange rate is trading around €1.1637, relatively unchanged from this morning’s opening levels.
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GBP/EUR Exchange Rate Wavers amid Elevated Rate Hike Expectations
The Pound Euro (GBP/EUR) exchange rate is fluctuating amid hawkish guidance from European Central Bank (ECB) and elevated rate hike bets from Bank of England (BoE).
At time of writing the GBP/EUR exchange rate is trading around €1.1635, relatively unchanged from this morning’s opening levels.
Euro (EUR) Underpinned by Hawkish ECB
The Euro (EUR) is managing to cling onto modest gains in the wake of hawkish ECB policymakers.
Despite relatively downbeat economic data of late, including Eurozone inflation decelerating more than expected, rate hike bets could be keeping the Euro supported. ECB President Christine Lagarde hinted that further tightening was needed, with little signs showing that underlying inflation having peaked.
Echoing these sentiments were several ECB policymakers. Despite cooling inflation, strong cases were made for further rate hikes from the central bank. Klaas Knot, the Dutch ECB Chief, believes further tightening is required to rein in inflation, saying:
‘(I’m) not yet convinced that the current tightening is sufficient. Inflation could well remain too high for a long time and further rate hikes will then be necessary.’
Pound (GBP) Supported by BoE Rate Hike Bets
Meanwhile, the Pound (GBP) continues to trade in a narrow range amid a lack of major economic data. A thin trading calendar leaves Sterling susceptible to market sentiment and is holding onto modest gains from elevated rate hike bets.
With the market now pricing in the BoE to raise interest rates to 4.75% from 4.5% at the June meeting, GBP investors remain buoyed. Furthermore, odds sit at a 60% chance of further tightening to 5.5% later this year. Despite inflation cooling, headline CPI still fell less than expected, and core prices surged to a 31-year high. Sterling remains relatively supported on increased rate hike bets.
Pound Euro Forecast: Stagnating Eurozone Economy to Dent the Euro?
Looking ahead, the Pound Euro exchange rate could see further movement with the latest estimate of economic growth in the Euro area. Following on from Germany entering a technical recession, a downgraded Eurozone GDP growth to zero growth could weigh on the single currency.
Meanwhile, amidst a continued lack of economic data, the Pound will be left to market sentiment. However, elevated rate hike bets could keep Sterling afloat ahead of labour market and GDP data next week.