Pound Euro (GBP/EUR) Exchange Rate Firms amid Bullish Market Impulse
(Article updated 16:35, 7/7/23) The Pound Euro (GBP/EUR) exchange rate is firming this afternoon, as bullish trade favours Sterling.
Inflation in the UK is remaining stubborn, and showing little sign of abating. Because of this, the Bank of England (BoE) are widely expected to hike interest rates by 50bps at the next meeting.
While these hikes are posing a double-edged sword, the risk-on market impulse appears to be brushing these concerns aside.
Furthermore, due to recent losses, Sterling could be enjoying dip-buying from investors.
For the Euro (EUR), its appeal may be limited by its safer nature than the increasingly risk-sensitive Pound.
At the time of writing, GBP/EUR is trading at around €1.1718, firming by just north of 0.2% from the morning’s opening rates.
Original article continues below:
Pound Euro Exchange Rate Narrow amid German Industrial Slowdown
The Pound Euro exchange rate is trading narrowly this morning, following a decline in German industrial production.
At the time of writing, GBP/EUR is trading at around €1.1704, showing little movement from the morning’s opening rates.
Euro (EUR) Undermined by German Industrial Decline
The Euro (EUR) is struggling for support this morning, following the latest German industrial production data.
May’s reading found that production had decreased by 0.2% on a monthly basis. This dour news is weighing on the Euro by suggesting the bloc’s largest economy is struggling to recover.
Because of this, it seems likely that the German recession could be extended, which would likely darken the EU’s economic outlook.
Carsten Brzeski, Global Head of Macro at ING, commented:
‘All in all, the monthly data for the first two months of the second quarter have not taken away the risk of a further contraction of the German economy. This would make it the first time since 2008 that the economy shrinks for more than two consecutive quarters.’
Elsewhere, comments from European Central Bank (ECB) President Christine Lagarde may be cushioning the Euro.
In an interview, President Lagarde stated that the bank ‘still has work to do’ to bring inflation down. The potential for further tightening could be bringing some support to EUR rates.
Pound (GBP) Lacks Support amid Overtightening Concerns
Meanwhile, the Pound (GBP) is lacking support as the data calendar remains light. Owing to this, the Bank of England’s (BoE) monetary policy remains under close consideration.
While some reports have begun to surface that a 7% terminal rate could be on the cards, investors remain wary. This level of tightening would likely push the UK economy into a recession, prompting substantial concern amongst analysts and investors alike.
Allan Monks, Economist at JP Morgan, explained:
‘We assume the BOE will pivot to a ‘high-for-long’ strategy with the intention of allowing the lags in transmission to finish off the job. This alone raises the risks of a hard landing next year, but we recognise that the policy rate required to control inflation is proving to be higher than most had expected.’
Elsewhere, a tepid market mood is likely stopping the risk-sensitive Sterling from pressing any advantage.
GBP/EUR Exchange Rate Forecast: UK Wage Growth Cooldown to Dent GBP?
Looking ahead to early next week for the Pound, the core catalyst of movement is likely to be May’s unemployment rate and wage growth data.
Unemployment in the UK is forecast to have increased to 3.9% on a monthly basis, while wage growth is expected to cool.
If this prints accurately, it will likely weigh on Sterling, by indicating a loosening labour market. Similarly, with wage growth considered a key inflationary pressure, the cooldown may dampen rate hike bets.
For the Euro, the main driver of movement will be the ZEW economic sentiment index for Germany, also due Tuesday.
July’s reading is forecast to decrease to -13, which could weigh on the common currency by indicating growing pessimism.