Pound Euro (GBP/EUR) Exchange Rate Firms on Single Currency Weakness
The Pound Euro (GBP/EUR) exchange rate rose through last week’s session as disappointing releases from Germany and the wider Euro area dismayed Euro (EUR) investors. Meanwhile, the Pound (GBP) enjoyed support from news that UK GDP was higher than originally thought at the end of 2021.
At the time of writing, GBP/EUR is trading at €1.1680, having risen by almost 0.3% over the course of the week.
Euro (EUR) Subdued by Volley of Weak Data
The Euro experienced successive headwinds last week: namely, lower German confidence levels, weaker economic sentiment across the bloc, persistent inflation and falling retail sales.
Investors behaved bearishly amid indications of economic instability, uncertain of the likely response of the European Central Bank (ECB). While acknowledging the negative signs in the economy, policymakers were reluctant to take a hawkish approach, instead suggesting via the latest monetary policy accounts that interest rates should not be raised further.
EUR/GBP briefly firmed during Tuesday’s session, breaking trend from an otherwise downbeat week. Weakness in the US Dollar (USD) helped propel the single currency higher, given the strong negative correlation between GBP and EUR.
Nevertheless, Thursday’s EU inflation data – following on from Germany’s above-forecast release the previous day – served to quash EUR optimism. Printing at 5.3% rather than the 5.1% forecast, the report inspired fears that monetary policy measures were not bringing price pressures down effectively.
Bert Colijn, economist at ING, conceded that ‘it does look like a further deceleration in inflation is in the making for the months ahead’; yet this failed to reassure Euro investors, who were further perturbed by a recovery in USD fortunes.
Pound (GBP) Supported despite Lingering Recession Fears
The Pound was buoyed against its peers last week by several positive stimuli, including an upbeat speech from the Bank of England (BoE)’s Huw Pill and better-than-expected UK manufacturing data. Lending an additional boost at the end of the week was news that by the end of 2021, economic growth in the UK exceeded initial estimates.
The start of the week was relatively quiet in terms of UK data: a national bank holiday suspended domestic market activity. Midweek however, GBP trended decisively higher amid risk-on sentiment and bullish rate hike hopes for the BoE.
On Thursday, traders’ optimism was validated by a hawkish speech from the central bank’s chief economist: Pill made the case for further monetary policy tightening, saying there was no room for complacency when it comes to inflationary pressures.
At the end of the week, Sterling enjoyed further support. The UK’s finalised Manufacturing PMI printed at 43 rather than the 42.5 forecast; still in contraction territory and below the previous month’s reading, yet better than expected.
Adding to tailwinds, data from the ONS painted the UK’s post-pandemic recovery in a better light than it had been previously. The ONS revised up GDP growth in 2021 by 0.9%, reflecting an 8.5% increase after a fall of 5.8%.
GBP/EUR Exchange Rate Forecast: ECB Uncertainty to be Addressed?
Into this new week, data and events from both the UK and the Eurozone are likely to shape the direction of the Pound Euro exchange rate.
A speech from the ECB’s President Christine Lagarde at the start of the week may help to clarify the central bank’s onward path; in Britain, an expected increase in retail activity may lend the Pound a boost.
German factory orders and EU sales are subsequently expected to tumble, possibly weighing on the Euro; continuing estimates of GDP growth, however, may help cap single currency losses. Other external factors, meanwhile, could intervene to influence GBP/EUR.