Pound Euro (GBP/EUR) Exchange Rate Drops to 4-Month Low

Pound Euro (GBP/EUR) Exchange Rate Weakens as Investors Digest BoE Decision

The Pound Euro (GBP/EUR) exchange rate is extending its downturn into today’s European session as economic uncertainty continues to sap Pound (GBP) investors’ confidence. Meanwhile, stronger-than-expected PMI results have helped to buoy the Euro (EUR).

At the time of writing, GBP/EUR is trading at €1.1507, almost 0.2% below this time yesterday.

Pound (GBP) Remains Subdued as Economists Assess Outlook

The Pound continues to sink against its peers today, pressured by the Bank of England (BoE)’s dovish decision yesterday as well as the prospect of weaker economic growth in the year ahead.

Retail sales in the UK were shown to have increased this morning, for the month of August – yet the data failed to provide a boost in Sterling exchange rates. Limiting tailwinds, the reading printed at 0.4% rather than the 0.5% expected.

The Office for National Statistics (ONS) remarked of the data that it represented a partial recovery following July’s fall; although online trade fell by 1.3% following a previous weather-inspired increase and fuel purchases likewise declined.

Traders continue to practice caution as the state of domestic inflation and its trajectory remain uncertain. While Wednesday’s headline inflation reading printed below forecasts, price pressures in the UK remain elevated. BoE Governor Andrew Bailey admitted yesterday that inflation is still a concern:

‘There’s no room for complacency,’ the central bank chief said; ‘We need to be sure inflation returns to normal and we will continue to take the decisions necessary to do just that.’

Elsewhere, economists at Commerzbank speculate that GBP fortunes may improve. ‘If the inflation outlook were to improve significantly Sterling might be able to recover slightly,’ said analysts, ‘At that point, the expectations that the BoE will cut its key rate due to the weak economy will then probably increase though.’

Euro (EUR) Trades Mixed Following PMI Release

The Euro is trading in a mixed range against its peers this morning, climbing against the Pound but subdued in several other exchange rates.

The latest PMI data from Germany is likely to blame: while exceeding expectations, both manufacturing and service-sector activity remained in contraction territory. According to the HCOB manufacturing PMI, German production fell by the most since May 2020 amid low demand.

Moreover, manufacturing data from the wider Euro area missed forecasts – though remained in growth territory. Printing at 43.4 rather than 44 as predicted, the reading pointed to a fragile recovery in the sector.

Strength in the US Dollar (USD) is another factor that invariably weighs upon the Euro. While the ‘Greenback’ has made limited gains so far today, yesterday’s strong performance may have capped support for the single currency.

Moreover, dovish rhetoric from European Central Bank (ECB) officials keeps EUR optimism in check. Speaking this morning, chief economist Phillip Lane stressed that inflation over 2% is costly for the economy, saying he:

‘Won’t be speculating on future European Central Bank policy moves… [but] the most efficient way to tighten monetary policy is via interest rates.’

GBP/EUR Exchange Rate Forecast: Eurozone Inflation in Focus

Looking ahead, GBP/EUR is likely to be influenced by a number of factors next week. Germany’s Ifo business climate release could dent EUR trading if it weakens as forecast, while the UK’s distributive trades index looks set to improve; subsequently, German consumer confidence is estimated to drop midweek.

In the spotlight, however, will be Friday’s inflation reading from the bloc. The data will likely inform the Euro’s trajectory, as rising price pressures are likely to trigger an intervention from the ECB. Both core and headline inflation are forecast to have weakened, however, more likely prompting a dovish response.

Olivia Evershed

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