GBP/EUR Advances despite Soft GDP Data as Markets Await FOMC Meeting

July 26, 2017 - Written by Toni Johnson

STORY LINK GBP/EUR Advances despite Soft GDP Data as Markets Await FOMC Meeting

The Pound Sterling to Euro exchange rate has been able to gain around 0.2% to trend in the region of 1.1210 today.

This is despite the fact that the latest UK GDP figures have shown that the economy remains on sluggish form, with only a small rise recorded after the sharp first-quarter slowdown.

UK GDP Rises to 0.3% in Second Quarter; GBP Makes Minor Gains

Preliminary estimates of the UK’s economic growth rate during the second quarter of the year have shown the expected sluggish uptick after the first quarter’s notable slowdown.

GDP managed to rise to 0.3% from 0.2% during the second quarter, with year-on-year growth slowing to 1.7% to 2% - in line with forecasts in both cases.

Because these estimates confirm what economists had predicted, the impact of the sluggish growth figures were already priced into Sterling, preventing a sharp decline.

In fact, GBP/EUR exchange rates are now rising.

Overall the figures suggest the gloomy outlook for the UK economy remains unchanged.

While the service sector did expand 0.5% in the last three months, there are serious doubts over its ability to keep growing as strong inflation and weak wage growth batter consumer spending by squeezing household incomes.

Berenberg Bank Senior UK Economist Kallum Pickering commented;

‘The UK would probably be growing at 2.5% or above this year were it not for Brexit, with strong gains in real wages and more business investment. We forecast real GDP growth of 1.6% in 2018 and 1.7% in 2019.’

Industrial output declined -0.4% and construction output fell -0.9% during the April-June period, showing that the UK economy remains significantly unbalanced.

Pickering said;

‘While the downside risks from the Brexit vote have not yet played out in a major way, the uncertainty stemming from Brexit is leading to caution in all areas of spending and policy that have long-term implications.’

EUR Soft as Markets Await Latest Update on US Monetary Policy

The Euro is softening today as the markets enter wait-and-see mode ahead of today’s US Federal Open Market Committee (FOMC) monetary policy meeting.

Hawkishness from the Fed would boost the odds of a rate hike in December, therefore adding downside risks to the long-term Euro outlook and allowing GBP/EUR exchange rates to appreciate.

Odds of at least one more interest rate hike from the Federal Reserve this year are currently at 52%, so dovishness from policymakers this evening would allow the Euro to rise sharply.

However, this could become its own problem, eventually leading to a downwards correction.

According to BTMU;

‘The pace and scale of recent euro strength has the potential if sustained to become more of a policy concern for the ECB by acting as a dampener on the outlook for economic growth and inflation in the euro-zone in the coming years.’

‘We would argue that the ECB should be particularly cautious over the potential disinflationary impact from the stronger euro given that underlying inflation remains well below the ECB’s target.’

Will Strong German Confidence Figures Push GBP/EUR Lower?

There is nothing left for release today, but there are several low and medium-impact releases on the UK and Eurozone data calendars tomorrow.

German retail sales figures for June might add downside pressure to EUR, as forecasts are for a month-on-month slowdown from 0.5% to 0.2% and a year-on-year slowdown from 4.8% to 2.7%.

The GfK German consumer confidence index is predicted to hold steady at 10.6, however, which may help dampen the impact of disappointing retail sales.

The Eurozone M3 money supply figure is unlikely to cause significant movement, unless it shows a major change.

The M3 measure charts the total amount of Euros and Euro-denominated assets in circulation within the currency bloc, so a strong uptick in the pace that this is increasing on the month would suggest inflation is set to rise faster.

The UK data consists of CBI reported retail sales and reported distributed sales.

Considering the service sector has just been shown to be the sole driver of economic growth again, markets will want to see a strong performance from the retail sector in July if hopes of a further uptick from Q2 weakness are to remain afloat.

International Money Transfer? Ask our resident FX expert a money transfer question or try John's new, free, no-obligation personal service! ,where he helps every step of the way, ensuring you get the best exchange rates on your currency requirements.

TAGS: Pound Euro Forecasts