Pound Euro (GBP/EUR) exchange rate hits four-day high following bleak German GDP

Pound Euro (GBP/EUR) exchange rate wavers amid warming ECB rate cut bets

The Pound Euro (GBP/EUR) exchange rate is subdued this morning after hitting a four-day high, amid renewed concerns about the German economy.

At the time of writing the GBP/EUR exchange rate is trading at around €1.1704, virtually unchanged from this morning’s opening rate.

Euro (EUR) wavers amid mixed data

The Euro (EUR) is trading without a clear direction this morning following mixed German data releases.

Germany’s finalised GDP figures for the fourth quarter of 2023 drew investor interest as the session opened. The data confirmed that the Eurozone’s largest economy shrank by 0.3% during the final quarter last year.

While yesterday’s private sector PMI numbers eased immediate concerns that the German economy may draw the wider Eurozone into a recession, today’s dismal data appears to outweigh any renewed optimism from the European Central Bank (ECB). The looming threat of a technical recession could pressure policymakers into enacting looser monetary policy in the coming months, serving to sour EUR sentiment today.

The report drew attention to declines in a large number of sectors, with a decrease in manufacturing activity likely weighing on the industry-heavy German economy.

However, Germany’s latest Ifo business climate indicator marginally improved in February, edging higher to 85.5 as forecast. Improving economic sentiment may cushion EUR’s losses as the session progresses, though surmounting ECB rate cut bets will likely be the core catalyst of movement today, amid extended recession concerns

Pound (GBP) subdued amid data lull

The Pound (GBP) is fluctuating this morning amid a lack of notable economic data.

Despite yesterday’s upbeat PMI figures, Sterling is struggling to garner investor support as markets continue to place their bets on summer rate cuts following news of a new price cap on UK gas and electric bills by energy regulator, Ofgem.

The average UK citizen’s fuel bill is due to fall by 12% from 1 April, which could significantly ease domestic inflationary pressures, as well as reducing cost-of-living concerns.

James Smith, Developed Markets Economist at ING, noted that falling energy prices could lead to wider disinflation, boosting the likelihood of a Bank of England (BoE) rate cut in the second quarter.

‘That’s set to take headline inflation below 2% in April and we think it will stay below the Bank of England’s target for much – if not all – of 2024. That should help unlock a summer rate cut, if coupled with progress on services inflation and wage growth.’

Pound Euro exchange rate forecast: ECB commentary to boost the Euro?

Going forwards, a series of speeches this morning from ECB policymakers could drive further EUR volatility. Both Kerstin af Jochnick and Isabel Schnabel are due to speak regarding Eurozone interest rates.

Schnabel in particular has been notably hawkish in recent weeks, advocating that rates must remain ‘higher for longer’ in order to curb the final stage of disinflation. Further talk of restrictive monetary policy could see the common currency firm amid continued push back against monetary loosening in the Eurozone.

However, should either policymaker strike dovish in her address, the Euro may falter amid increased rate cut expectations.

A data-light afternoon for both the UK and the Eurozone could see the Pound Euro exchange rate vulnerable to market volatility, trading in a wide range. Ongoing mixed trade may cause unclear movement for the currency pairing. However, a shift towards upbeat trading conditions could see the increasingly risk-sensitive Pound firm against the safe-haven Euro.

Yasmine Arasteh

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