GBP EUR Outlook Unclear As BoE Increases UK GDP Forecast

May 15, 2013 - Written by Tim Boyer

STORY LINK GBP EUR Outlook Unclear As BoE Increases UK GDP Forecast

It was a good news / bad news morning in the currency markets for the Pound Sterling. On the credit side, the Bank of England’s Inflation Report saw the UK’s central bank upwardly amend its growth prediction for Britain’s economy, with overall activity expected to expand by 0.5% during the three months to the end of June 2013.

The positive forecast, which if it comes to pass, will mean that the British economy has pulled further away from recession helped the Pound. However, this encouraging headline prediction was tempered by Governor Mervyn King’s assertion that the improvement in the UK economy would be ‘modest and sustained’. Investors holding Sterling-denominated assets were hoping for a more upbeat assessment from the Bank’s Governor. As ever, market participants voted with their feet and the GBP EUR rate only managed to improve to 1.1845 on the day.

Gains for the Pound to euro exchange rate (currency : GBP EUR) would surely have been of a greater magnitude were it not for Office of National Statistics numbers which confirmed that the overall rate of UK unemployment increased by 15,000 to 2.52m during the first quarter of 2013. The level of joblessness in the British economy has steadfastly refused to fall since the global financial crisis began to unfurl during the early part of 2008. The high level of residual unemployment in the British economy points to inherent weaknesses in the UK economy after three decades of under-investment in the domestic manufacturing and industrial sectors. Such a structural fault is likely to hold back Sterling in the medium to long term.

Elsewhere, this morning’s latest whole of eurozone GDP growth figures showed that activity in the region contracted by a slightly larger than anticipated 1.0% during the first three months of 2013. Increasingly, the GBP EUR market is looking like a slugfest between the currencies of two inherently weak economies. As of this point, there is no clear winner.

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