Pound Euro (GBP/EUR) Softens as UK Recession Fears Rise
The Pound Euro (GBP/EUR) exchange rate is weakening as economists predict UK interest rates to peak at 5.5% in September.
At time of writing, the GBP/EUR exchange rate is around €1.1680, a 0.22% drop from this morning’s opening levels.
Pound (GBP) Undermined by Uncertain Economic Outlook
The Pound (GBP) is struggling for demand this morning amid mounting concerns over the UK economy. Matters were compounded by expectations of interest rates peaking at 5.5% after the next policy meeting.
With yesterday’s dire PMI data exacerbating fears over the UK economy’s vulnerability, recession fears were once again fuelled. As the crucial services sector entered contraction territory for the first time since January, manufacturing stopped to its lowest level since the pandemic.
Furthermore, a poll from Reuters has revealed that the Bank of England (BoE) are expected to halt their tightening cycle. After September’s meeting and an expected rise, economists predict it could be the last. Fears of surging interest rates pushing the UK into a recession has seen the central bank consider pumping the brakes on further hiking.
A 15th consecutive interest rate raise would bring the cash rate to 5.5%. Whereby policymakers are now weighing up the consequences of further rate hikes. With recent falls in retail sales and shrinking business activity, the UK economy could slip into a recession if things don’t improve. James Smith, Developed Markets Economist at ING, commented:
‘The August (Bank) meeting began to lay the ground for a pause. I think the fact the Bank is now finally admitting (its) policy is restrictive. (And) is now a turning process to convince markets rates are going to stay high for quite some time.
‘It comes down to the data. Ideally, they would like to stop hiking, given rates are restrictive. By November, the Federal Reserve will be done hiking and potentially also the European Central Bank, so it is a risk being seen as the last hawk standing somewhat unnecessarily.’
Euro (EUR) Undermined by USD Strength
Meanwhile, the Euro (EUR) is also failing to find a clear direction today amid a lack of economic data. Following on from the Eurozone’s own poor PMI data, a resurgent US Dollar (USD) could be sapping the Euro on its negative correlation.
Fears of an economic slowdown across the Euro area could also be continuing to weigh on EUR investors today. Yesterday’s disappointing PMI data further highlighting a stuttering German economy, and a wider Euro area slowdown. Expectations of further interest rate hikes from the European Central Bank (ECB) are severely slashed, denting the Euro.
Pound Euro Exchange Rate Forecast: Souring Consumer Confidence to Sap Sterling?
Looking ahead, the Pound Euro exchange rate could see further movement with the latest GfK consumer sentiment indicator. Despite an expected mild improvement in confidence, the reading is still firmly entrenched in the negative zone, showcasing the downbeat consumer confidence in the economy.
Meanwhile, the latest Ifo business climate index for Germany could drag the Euro lower if the forecast proves true. A fourth consecutive fall in business confidence could signal the long road to economic recovery is weighing on businesses, and the Euro could slump.