Pound Euro (GBP/EUR) Exchange Rate Narrows as German Economy Shrinks Further

February 24, 2023 - Written by John Cameron

STORY LINK Pound Euro (GBP/EUR) Exchange Rate Narrows as German Economy Shrinks Further

Pound Euro (GBP/EUR) Exchange Rate Narrows as German Economy Shrinks Further

The Pound Euro (GBP/EUR) exchange rate narrowed on Friday, following the news that the German economy had contracted more than initially thought in the fourth quarter.

At the time of writing, GBP/EUR was trading at around €1.1330, showing little movement from Friday’s opening rates.

Pound (GBP) Undermined by Domestic Headwinds

The Pound (GBP) traded in flux on Friday, as a lack of major macroeconomic data releases left Sterling open to domestic headwinds.

While consumer sentiment was seen to have rebounded, the cost of living crisis is serving to keep consumer spending highly restricted. On top of this, supermarkets have seen shortages in fresh food such as vegetables and salad.

Further compounding this is continually soaring food inflation. Everyday staples and own brand products have grown rapidly in price over the past year, with inflation bearing down on lower income households.

Sue Davis, Head of Food Policy at Which?, commented further. She stated: ‘It’s clear that food costs have soared in recent months, but our inflation tracker shows how households relying on supermarket value ranges are being hit the hardest. Supermarkets need to act and Which? is calling for them to ensure everyone has easy access to basic, affordable food ranges at a store near them.’

However, rate hike bets have likely underpinned the Pound. Following a hawkish speech from Bank of England (BoE) policymaker on Thursday, GBP investors have been hopeful for further tightening.

Euro (EUR) Undermined by German Economic Contraction

The Euro (EUR) was limited in its gains on Friday, following news that the Eurozone’s largest economy had contracted in the fourth quarter of 2022.

The German economy was bogged down by inflation and the continuing European energy crisis, which had a detrimental impact on household consumption and capital investment.

Initial readings had pointed to a 0.2% contraction, but Friday’s final reading came in at -0.4% in a surprise downward revision.

Carsten Brzeki, Global Head of Macro at ING, commented: ‘The second consecutive drop in the Ifo’s current assessment component, a falling PMI manufacturing and, as reflected in this morning’s data, weak consumer confidence and a willingness to spend close to historical lows, all confirm our view that the German economy will contract once again in the first quarter.’

As such, fears over a German recession have kept the Euro muted during Friday mornings trade. Furthermore, with analysts predicting further contractions in 2023, the bleak economic outlook is keeping sentiment low towards the common currency.

Elsewhere, as Ukraine marks the first anniversary of Russian’s invasion, anxieties linger over further escalations. Reports circulated earlier in the week that a fresh ground offensive was planned, as Russian President Vladimir Putin ratcheted up his anti-Western rhetoric.

Pound Euro (GBP/EUR) Exchange Rate Forecast: German Data in Focus

Looking ahead for the Euro, the core catalyst of movement is likely to come from a string of German data due to be released on Wednesday.

Retail sales and employment data for January and February respectively are due. Currently, retail sales are forecast to show a massive return to increases through January, and are expected to print at 4.5% up from -5.3%. If this prints accurately, EUR could strengthen as the bloc’s largest economy shows signs of healthy consumption.

However, the uptick in German unemployment to 5.6% from 5.5% may limit these gains, as it shows signs of the labour market loosening somewhat. This could bring down rate hike expectations for the European Central Bank (ECB).

Elsewhere, any further news on the Ukraine Russia war could weigh on the Euro. Rumours are abound of a fresh Russian assault, which could spark anxiety.

For the Pound, Bank of England (BoE) Governor Andrew Bailey is due to speak on Wednesday. If he strikes a hawkish tone, GBP could rally. However, a dearth of economic releases leading up to this speech could leave Sterling vulnerable to domestic headwinds.

Investors may be mindful of further headlines on industrial action and the UK’s cost of living crisis, which could weigh on the Pound.

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