Pound Euro (GBP/EUR) Exchange Rate Slips as UK Construction Contracts

January 6, 2023 - Written by John Cameron

STORY LINK Pound Euro (GBP/EUR) Exchange Rate Slips as UK Construction Contracts

Pound Euro (GBP/EUR) Exchange Rate Weakens as UK Construction Contracts

The Pound Euro (GBP/EUR) exchange rate weakened on Friday, as the UK’s construction sector entered contractionary territory.

At the time of writing, GBP/EUR traded at around €1.1298, a decline of 0.2% from Friday’s opening rates.

Pound (GBP) Slips as Construction Contracts

The Pound (GBP) weakened on Friday, as December’s construction PMI data pointed to contraction in the sector, with activity and new work declining at the fastest rates since May 2020. This added further fuel to the recession concerns, and prompted a decline in sentiment towards Sterling.

Lewis Cooper, Economist at S&P Global Market Intelligence, stated: ‘The UK's construction sector registered a relatively poor finish to 2022, with business activity falling into decline following a three-month growth sequence amid the fastest contraction in new work since the initial pandemic period in May 2020. Companies cited weak client demand, driven partly by higher prices amid ongoing inflationary pressures.’

Furthermore, house prices across the UK continued to fall. As such, the steepest fall in house prices since 2009 further compounded recession anxieties in investors, and added to a darkening outlook for the UK’s economy.

Continuing industrial action also added further headwinds to the Pound during Friday’s session. The walkouts were beginning to have an impact on the UK economy, and showed little sign of abating.

Euro (EUR) Firms as Inflation Softens

The Euro (EUR) firmed on Friday, as the latest inflation data showed that headline CPI had softened far below forecasts to 9.2% year on year. While predicted to fall to 9.7%, the result has provided optimism to investors that inflation in the Eurozone has begun to cool, and that the bloc is past the peak.

Furthermore, inflation is still far above the European Central Bank’s (ECB) consistently stated target of 2%.

Bert Colijn, ING’s Senior Eurozone Economist, offered a further prediction for inflation’s trajectory. He stated: ‘The ECB has taken a very hawkish stance towards this development and has indicated that it will hike through a mild recession to bring inflation structurally down to 2%. With energy inflation dropping quickly and energy supply forecasts improving, 2% could be reached much sooner than expected. Still, rising core inflation will be enough for the ECB to continue to hike by 50bp in February and March.’

However, core inflation remains high and the fall in energy inflation may have been down to the German government’s one off intervention. As such, rate hike bits remain for investors, prompting the support.

Yet, developments in the Ukraine-Russia conflict may have capped EUR’s gains. Ukraine firmly rejected Russia’s offer of a peace fire during orthodox Christmas, pointing to signs that the conflict will likely continue.

Pound Euro (GBP/EUR) Exchange Rate Forecast: Sterling to Buckle Under Domestic Pressure?

Looking ahead for the Pound (GBP), trading conditions are thin throughout next week. As such, investors may shift their focus to domestic headlines from within the UK.

Due to the ongoing cost-of-living crisis and recession, any further developments on how these are shaping businesses and impacting UK households may capture investor attention. With the UK’s economic outlook darkening, these headlines could weaken Sterling.

Industrial action may be a further focus for investors too, with ever more sectors announcing plans for walkouts. With the strikes already having an impact on the UK economy and the stand-off between unions and government ministers continuing, it remains to be seen if there is any sign of stopping. Because of this, investors may grow more concerned and sentiment towards Sterling could wane.

For the Euro (EUR), trading conditions are similarly thin. With the recent fall in inflation, any comments from members of the European Central Bank (ECB) may affect the single currency. A hawkish stance could strengthen the Euro, whereas acknowledgement that tightening may be able to slow could weaken it.

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