Pound Euro Exchange Rate Briefly Strikes One-Month Low as UK Economy Contracts in July

Pound Euro (GBP/EUR) Exchange Rate Drops following Weak UK GDP

The Pound Euro (GBP/EUR) exchange rate faced volatility this morning, slumping after UK GDP missed forecasts before bouncing back.

At the time of writing, GBP/EUR is trading at €1.1619, roughly the same level as it was at the start of the session, having rebounded off a one-month low of €1.1586.

Pound (GBP) Falls as GDP Shrinks More than Forecast

The Pound (GBP) fell sharply this morning after a larger-than-forecast contraction in the UK economy in July stoked recession fears.

The UK’s latest GDP figures showed that the British economy shrank 0.5% in July, worse than the expected contraction of 0.2%.

The steeper downturn came as unseasonably wet weather and ongoing strike action hit economic output.

Allan Monks, an economist at JPMorgan, said:

‘It may be tempting to downplay the weakness in July as a combination of strike action, poor weather and general payback from the 0.5% GDP rise reported in the prior month. But the source of weakness appears to have rotated more towards private sector services.

‘When taken in conjunction with the recent slide in the PMI, recent outturns look more concerning – especially with that survey sliding further into August.’

In addition, Paul Dales, Chief UK Economist at Capital Economics, said that July’s fall in GDP could be the start of a mild recession:

‘With output declining in 11 of the other 16 sectors, there is an air of underlying weakness. That would make sense given that the dampening effect of higher interest rates should be starting to be felt a bit harder now and when other indicators, such as the activity PMIs which exclude the drag on public sector activity from strikes, are also pointing to recession.’

Following the GDP data, Sterling slumped to a one-month low against the Euro (EUR). However, GBP/EUR has managed to rebound, with investors seemingly buying the dip.

Euro (EUR) Sheds Gains as Industrial Output Slumps

Meanwhile, the common currency was unable to hold on to its gains against the Pound, with EUR investors seemingly anxious ahead of tomorrow’s European Central Bank (ECB) interest rate decision. The possibility that the ECB could end its hiking cycle tomorrow is keeping a lid on the Euro.

Furthermore, the Eurozone’s latest industrial production figures missed forecasts. Output in the bloc slumped 1.1% in July, far worse than the forecast 0.7% downturn.

These factors are weighing on the Euro today, leaving the single currency unable to retain its gains against the Pound.

Pound Euro Exchange Rate Forecast: ECB in the Spotlight

Looking ahead, tomorrow’s ECB decision takes centre stage.

Analysts are split over whether the ECB will decide to raise interest rates or leave them on hold. Although Eurozone inflation and wage growth remain uncomfortably high, there are signs that the bloc’s economy is slowing significantly.

Amid the uncertainty, the knife-edge decision could drive volatility. A rate hike could see EUR strengthen, while a hold could dent the common currency.

Investors will also be looking for hints about the ECB’s plans for policy in the future. Any indication that the bank is at the end of its tightening cycle could see the Euro slump.

Whatever happens, we may see some big swings in the GBP/EUR exchange rate as markets respond to the rate decision and the following press conference.

Samuel Birnie

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