Pound Euro Exchange Rate Wavers after Eurozone Entered Recession
The Pound Euro (GBP/EUR) exchange rate is trading erratically amid growing fears over the Eurozone economy.
At time of writing the GBP/EUR exchange rate is trading around €1.1653, relatively unchanged from this morning’s opening levels.
Euro (EUR) Undermined by Weak Economic Data
The Euro (EUR) is struggling to find a clear direction this morning after a string of disappointing economic data. Fears of a stuttering economy in the Euro area could be weighing on EUR sentiment.
With GDP growth unexpectedly slowing in the first quarter of the year, the Eurozone economy entered a recession. Economic growth slowed by 0.1% for the second consecutive quarter, as economic output contracted. The recent trend of disappointing data could be denting investor confidence surrounding the European Central Bank’s (ECB) monetary policy. Economists at ING commented on the latest data:
‘Domestically, the news of the Eurozone entering a technical recession after the 1Q GDP revision was understandably overlooked by the market, and may well be overlooked too by an inflation-focused ECB next week.’
Further sapping demand for the Euro could be the latest comments from ECB policymakers. In a speech this morning, ECB Governing Council member Francois Villeroy de Galhau admitted that inflation was starting to ‘really slow down’. Adding that GDP growth in the Eurozone should ‘be at least 0.6%’.
However, the negative correlation the Euro shares with the US Dollar could be limiting losses as the latter weakens. With growing expectations the Federal Reserve will pause their aggressive tightening cycle, demand was sapped for the safe-haven US Dollar, buoying the Euro.
Pound (GBP) Supported by Rate Hike Bets
Meanwhile, the Pound (GBP) continues to drift listlessly amid a lack of economic data. With a mixed market mood, expectations of the Bank of England (BoE) to continue their tightening cycle through the summer, GBP remains relatively supported.
However, economists at Commerzbank warn that the market may have to lower their expectations for the central bank. As investors have begun pricing in rate hikes through to the end of 2023, Commerzbank believe the market should temper those expectations. Noting that inflation is likely to ease more notably, they added:
‘We consider it to be less likely that the BoE will hike interest rates until year-end as we assume that inflation rates will ease more notably over the coming months and that this will provide the BoE with scope to end the rate hike cycle already at an earlier point. That means the market will have to lower its expectations regarding the BoE at which point Sterling will come under depreciation pressure.’
Pound Euro Forecast: Strong UK Data to Bolster the Pound?
Looking ahead to next week, the Pound Euro exchange rate could see movement with a flurry of economic data. GDP growth data and employment statistics for the UK could bolster rate hike expectations from the BoE. An unchanged unemployment rate and a return to MoM growth could keep rate hike bets elevated, and continued support for Sterling.
Meanwhile, the Euro could see wild fluctuations ahead of the interest rate decision from the ECB on Thursday. Eurozone industrial production and economic sentiment are due to print in the meantime, and any further downbeat data could pare rate hike bets, souring the Euro.