Pound Euro (GBP/EUR) Exchange Rate Falls as UK Economic Outlook Remains Dour

January 27, 2023 - Written by John Cameron

STORY LINK Pound Euro (GBP/EUR) Exchange Rate Falls as UK Economic Outlook Remains Dour

Pound Euro (GBP/EUR) Exchange Rate Falls as UK Economic Outlook Remains Dour

The Pound Euro (GBP/EUR) exchange rate weakened on Friday morning, as the UK’s economic outlook remained bleak amid thin trading conditions.

At the time of writing, GBP/EUR traded at around €1.1368, showing a decline of roughly 0.2% from Friday’s opening rates.

Pound (GBP) Slips as UK’s Economic Outlook Remains Downbeat

The Pound (GBP) weakened against most of its major peers on Friday morning, as the UK’s economic outlook continued to bear down on Sterling.

Recession forecast have worsened throughout the week, amid further downbeat news from the Confederation of British Industry (CBI) which pointed to a sharp fall in retail sales.

Furthermore, a speech from UK Chancellor Jeremy Hunt appeared to be uninspiring to GBP investors, despite reiterating the UK government’s determination to halve inflation. Similarly, Hunt’s proposed pillars to inspire growth within the UK economy appeared uninviting, as he shied away from promising tax cuts.

Elsewhere, the HS2 railway project added a point of contention on Friday morning, as reports circulated that the train may not reach London until 2038 at the earliest. Similarly, the project appears to have run substantially over budget.

Furthermore, a cautious market mood could have added to Sterling’s troubles, due to its increasingly risk-sensitive nature.

Euro (EUR) Narrows amid Thin Trading Conditions

The Euro (EUR) narrowed on Friday morning, amid thin trading conditions for the single currency. As such, investors may have focused on developments within the Ukraine-Russia war.

This week, Germany and other Western allies pledged to provide Ukrainian forces with additional heavy tanks, such as the M1 Abrams tanks from America and German Leopard tanks. This was then met with a barrage of missiles from Russia, striking Kyiv.

As such, EUR investors seem concerned about the room for further escalations in the conflict, which has sapped sentiment towards the single currency over the course of the week.

The Euro may have been underpinned by hopes from further high interest rate hikes from the European Central Bank (ECB) in the morning, ahead of next week’s interest rate decision.

ECB policymakers have reiterated their support of further tightening throughout the week, with Gabriel Makhlouf stating: ‘Bearing in mind that inflation is very high and core inflation has actually gone up slightly, it would not be surprising to see us continue on this path of interest rate rises beyond the first quarter.’

Pound Euro (GBP/EUR) Exchange Rate Forecast: Central Bank Interest Rate Decisions in Focus

Looking ahead to the upcoming week for the Pound (GBP), the key event on the calendar will be the Bank of England’s (BoE) interest rate decision on Thursday.

Currently, markets have priced in a 50bps rate hike from the BoE, as inflationary pressures continue to mount across the UK. As such, if this prints as expected it may do little for Sterling. However, with the BoE potentially divided over the future course of monetary policy, any further divisions could weaken Sterling.

Inflation in the UK remains far beyond the BoE’s target of 2%, which may drive the central bank to strike a hawkish attitude towards inflation. If that comes to pass, Sterling may strengthen as investors begin to anticipate further interest rate hikes.

For the Euro (EUR), January’s inflation data from Germany and the Eurozone as a whole is due to print next week. Headline inflation in Germany is forecast to fall from 9.1% to 8.6% in Germany on Tuesday, with Wednesday’s EU figures to fall from 9.2% to 9%.

If forecasts are accurate, the single currency could weaken despite the hawkish stance of the European Central Bank (ECB). The ECB are expected to deliver another 50bps interest rate hike on Thursday, followed by a press conference.

If the ECB continues to strike a hawkish note, then the Euro may gain ground against its peers by reaffirming investor hopes for a continued course of tightening.

Beforehand, Germany’s GDP data for Q4 2022 is due to print on Monday. Currently, the yearly growth rate is forecast to hold at 1.3%, which may boost the Euro by showing the resilience of the bloc’s largest economy.

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TAGS: Pound Euro Forecasts