Pound Euro (GBP/EUR) Exchange Rate Trades Sideways as Rumours Swirl of Slashed UK Growth Forecast

January 25, 2023 - Written by John Cameron

STORY LINK Pound Euro (GBP/EUR) Exchange Rate Trades Sideways as Rumours Swirl of Slashed UK Growth Forecast

Pound Euro (GBP/EUR) Exchange Rate Narrows as UK Growth Outlook May Lower

The Pound Euro (GBP/EUR) exchange rate narrowed on Wednesday, as rumours swirled that the UK’s growth outlook could be cut down.

At the time of writing, GBP/EUR traded at around €1.1329, showing little deviation from Wednesday’s opening rates.

Pound (GBP) Muted as UK Growth Outlook Rumoured to be Slashed

The Pound (GBP) traded narrowly on Wednesday morning, as concerns over the UK’s economic outlook continued to intensify.

Reports circulated which stated that the Office for Budget Responsibility (OBR) told the Chancellor Jeremy Hunt that it’s previous medium term growth outlook may have been overly optimistic.

The previous forecast said that the UK economy would shrink by 1.4% in 2023, before returning to growth with a 1.3% expansion in 2024. However, a report from The Times indicates that the OBR will slash these forecasts by up to 0.5%.

With underlying economic weakness and labour shortages pointed to as the reason for the decline, this may add further pressure to the UK treasury ahead of the spring budget in March.

As such, growth incentives may suffer, much to the chagrin of GBP investors in the midst of a continually bleak economic outlook, leaving Sterling to struggle during Wednesday’s session.

Euro (EUR) Struggles as Ukraine-Russia Escalation Fears Return

The Euro (EUR) struggled for support on Wednesday morning, as concerns over further escalation in the Ukraine-Russia conflict could be keeping the Euro on a downbeat note.

Germany and the US have agreed to begin providing Ukraine with heavy tanks in order to assist the country in fighting invading Russian forces, in what could prove to be a significant sea change in the course of the conflict.

As such, anxieties have amplified over further escalations in the war which has continued to weigh on the Eurozone economy.

However, an upbeat showing from January’s German Ifo data releases may be cushioning the single currency against further losses. As the bloc’s largest economy, the release could provide optimism for the Eurozone’s economy at large.

The Ifo’s business climate survey printed at 90.2, in line with market forecasts and showed an improvement from December’s reading of 88.6.

Carsten Brzeski, the Global Head of Macro at ING, commented on the news, stating:
‘The German economy has been more resilient despite a long series of crises in 2022, which threatened to push it into a deep recession. The reason for this resilience is not so much the structure of the economy but rather a simple policy recipe that the German government has successfully used over the last 15 years and perfected recently: fiscal stimulus.’

Pound Euro (GBP/EUR) Exchange Rate Forecast: CBI Distributive Trades Survey to Dampen GBP?

Looking ahead for the Pound (GBP), Thursday brings the release of the Confederation of British Industry’s (CBI) distributive trades survey results for January. Currently, a fall from 11 to -5 is forecast, which could point to further downturn in the UK’s retail sector.

In conjunction with the previous week’s bleak retail sales data for December, it may add further pressure on Sterling by signposting difficulties in retail. The UK’s economy leans on consumer spending during times of economic downturn, which may be slowing as inflation and the cost of living crisis continues to impact consumer’s spending ability across the UK.

Furthermore, industrial action is continuing unabated across the country. With the UK’s economy already feeling the impact of the walkouts, any news of further industrial action may weigh on Sterling. However, any signs of a breakthrough in negotiation could boost GBP by offering optimism that a resolution can be reached.

Elsewhere, due to the Pound’s increasingly risk sensitive nature, a shift to an upbeat market mood could lift GBP against safer peers.

For the Euro (EUR), liquidity is thin in the short term, due to a lack of impactful macroeconomic data releases. As such, the single currency may be left vulnerable to any developments in the Ukraine Russia conflict. With the US and Germany beginning to send tanks to aid Ukraine, further developments could weigh on EUR.

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TAGS: Pound Euro Forecasts