GBP/EUR Remains Undiverted by Lagarde Comments
(Updated 15:45, 04/09/2023) The Pound Euro (GBP/EUR) exchange rate appeared not to change materially as ECB President Christine Lagarde gave her scheduled speech this afternoon.
Taking a firm stance, Lagarde said that ‘it will be critical for central banks to keep inflation expectations firmly anchored… it is exactly when people are paying most attention that central banks should deliver their key communication.’
Lagarde is likely hoping to prevent against market volatility as a result of investors’ expectations not playing out. Undue investor optimism can derail currency stability if expectations subsequently aren’t met.
Attempting a measured tone, Lagarde also added that the current level of interest in rising prices is both a challenge and an opportunity for central banks, but warned against ‘the rising tide of fake news’ which can direct forecasts in unhelpful directions.
She lamented that ‘falsehoods on Twitter, now known as X, are found to spread about 10 to 20 times faster than facts’, compelling central bank policymakers to remain vigilant.
Original article continues below:
Pound Euro (GBP/EUR) Exchange Rate Firms Further despite Lack of UK Data
The Pound Euro (GBP/EUR) exchange rate has climbed so far today despite a lack of UK data in the docket. Possibly propelling the Pound (GBP) higher against its peers is a risk-on market mood; on the other hand, weakness in the Euro (EUR) is also likely boosting GBP/EUR.
At the time of writing, GBP/EUR is trading at €1.1700, almost 0.2% than this time yesterday.
Euro (EUR) Sinks as German Exports Slow
The Euro is feeling the pressure today as economic performance in the bloc’s largest economy disappoints. Ahead of a potentially market-moving speech from European Central Bank (ECB) President Christine Lagarde, EUR investors erred on the bearish side.
At the start of the European session, Germany’s trade balance printed at €15.9bn rather than the €18bn forecast; a bigger drop than the €0.7bn fall economists had anticipated. According to the Federal Statistical Office, sales to countries outside the EU declined by 2.5%, while purchases from third countries fell 0.2%.
Commentators at ING Bank expressed the effect of the release on EU morale, explaining:
‘Disappointing export and retail sales data shows that the German economy started the third quarter on a weak footing. The risk of falling back into contraction remains high.’
Reflecting such concerns, Sentix’s index for the euro zone subsequently declined to -21.5 points in September from -18.9 in August. This marks the lowest reading since last November and according to Sentix managing director Manfred Huebner is testimony to the ‘complete lack of economic competence in political leadership’ and enormous uncertainties for the economy.
Pound (GBP) Supported despite Lingering Recession Fears
The Pound has managed to extend last week’s gains against the single currency and is trading positively against the majority of its peers today amid a risk-on market mood. According to market analysts, bullish sentiment is reflected by the impressive gains recorded in major Asian equity indexes.
Also continuing to buoy Sterling morale are expectations that the Bank of England (BoE) will maintain a hawkish monetary policy stance this month, given persistent UK inflation. Such expectations follow on from a bold speech last week given by the BoE’s chief economist, Huw Pill, who said:
‘We need to see the job through on inflation… There is a lot of policy in the pipeline to come through.’
GBP is not entirely without headwinds, as UK factory activities have reportedly dropped to 43: the lowest reading in the past 39 months. As last Friday’s finalised manufacturing PMI revealed a significant deterioration in operating conditions, markets continue to digest the likely impact on businesses.
Economics consultancy CEBR predicts that around 28,000 UK businesses will fold next year as a result of higher interest rates; but UK politicians are confident that inflation is on the way down, relieving pressures on households and businesses alike.
GBP/EUR Forecast: Lagarde Speech to Alter Exchange Rate Direction?
Later today, the impact of Christine Lagarde’s speech regarding inflation in the Eurozone may be more keenly felt, potentially capping GBP/EUR gains. Lagarde’s stern leadership style could act as a tonic to fraught and uncertain investors amid signs of economic woe.
On the other hand, continuing signs of German economic weakness are unlikely to be forgotten and will probably continue to cap potential gains for the single currency. While a lack of further UK data may prevent the Pound from trending much higher, GBP/EUR is unlikely to sink considerably unless external factors intervene to alter market sentiment.