Pound Euro (GBP/EUR) exchange rate rebounds on mixed German data

Pound Euro (GBP/EUR) exchange rate fluctuates following conflicting Eurozone data

The Pound Euro (GBP/EUR) exchange rate recouped yesterday’s losses overnight, though appears ultimately rangebound this morning, following mixed German data releases.

At the time of writing the GBP/EUR exchange rate is trading at around €1.1708, virtually unchanged from this morning’s opening rate.

Euro (EUR) wobbles amid unclear outlook

The Euro (EUR) is wavering this morning as the latest economic data offers a mixed outlook for the Eurozone.

German retail sales unexpectedly slumped in December, falling by 1.6%, rather than rising by 0.7% as economists had predicted.

The significant deviation from forecasts served to initially dent EUR this morning, stoking renewed concerns that a technical recession remains on the cards for the Euro area, despite reports of the Eurozone’s economic flatline yesterday.

Melanie Debono, economist at Pantheon Macroeconomics, explains:

‘Over the year as a whole retail sales were down by 3.1%, more than DESTATIS had assumed in January, according to the press release, which means we cannot rule out a downward revision to the already-abysmal GDP outcome for 2023.’

However, these losses were offset by strong employment data later in the morning, as the German unemployment rate unexpectedly fell to 5.8%. Signs of a continually robust labour sector are seemingly cushioning EUR’s downside, buoying the Euro as the session progresses.

Pound (GBP) mixed amid lack of data

The Pound (GBP) is moving without a clear direction this morning, ahead of tomorrow’s hotly anticipated monetary policy update.

While markets widely expect the Bank of England (BoE) to deliver a continued hold on interest rates, at 5.25%, any accompanying guidance from policymakers will likely drive GBP volatility.

Shaan Raithatha, Senior Economist and Strategist at Vanguard, expects central bankers to smooth the way for summer rate cuts tomorrow during their address:

‘Given the large undershoot to the inflation forecast in recent months, we expect the tightening bias to be dropped and instead anticipate monetary policy committee members will lay the groundwork for rate cuts in the middle of the year.’

With a rate cut firmly on the cards for 2024, persistently high core and services inflation in the UK may see the BoE continue to push back on imminent cuts, further delaying its looming unwinding cycle.

Investors will likely remain reluctant to place any aggressive bets on Sterling ahead of further supporting commentary/data releases tomorrow.

Pound Euro exchange rate forecast: inflation data to boost ECB rate cut bets?

Looking forwards, Germany’s latest inflation data is due this afternoon. Economists forecast that January’s year-on-year inflation rate will cool to 3%, down from 3.7%. This could apply renewed pressure to ECB rate-setters to begin loosening monetary policy, as market expectations of looming rate cuts are reinforced.

On Thursday, the inflation rate for the wider Eurozone is due, with expectations of marginal cooling to 2.8% in January’s year-on-year estimate. This will likely underpin surmounting expectations of a spring interest rate cut, thereby denting EUR.

Looking to the UK, the Bank of England is due to enact its latest monetary policy update on Thursday. Suggestion that the BoE plans to maintain its ‘higher for longer’ stance surrounding interest rates may serve to lift GBP.

However, while persistently high interest rate continues to stifle consumer activity in the UK, any hawkish commentary may fail to convince investors that cuts remain a far off possibility.

Yasmine Arasteh

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