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GBP EUR Exchange Rate Struggles to Make Headway as Eurozone Unemployment Falls

January 9, 2018 - Written by David Woodsmith

Even though Eurozone data continued to impress this failed to shift the Pound Euro (GBP EUR) exchange rate from a narrow trend on Tuesday.

A sharp widening of the German trade surplus and a fresh dip in the Eurozone unemployment rate were not enough to shore up demand for the Euro, even though signs still point towards another strong year for the domestic economy.

The mood towards the Pound, meanwhile, remained relatively muted in the wake of Theresa May’s rather anticlimactic cabinet reshuffle.

As the Prime Minister’s fragile position was only further highlighted by the limited shuffle, and the refusal of some ministers to move, the GBP EUR exchange rate was unable to capitalise on the Euro’s bearishness.

Strong 2017 German GDP May Reserve GBP EUR Exchange Rate Gains

Confidence in the Euro remains distinctly lacking this week, in spite of the persistent strength of domestic data.

In large part this is due to doubts over the likelihood of the European Central Bank (ECB) returning to a monetary tightening bias in 2018.

With markets betting that the ECB will leave its quantitative easing program in place for some time to come the upside potential of EUR exchange rates has been decidedly limited.

Analysts at Lloyds Bank noted:

‘The region’s jobless rate has declined steadily since peaking in the aftermath of the sovereign debt crisis at just above 12% in 2013. Despite that, wage growth has so far remained subdued, suggesting that some slack in the labour market remains. In turn, this supports the ECB’s gradual reduction in policy stimulus this year, even though some more-hawkish members are pushing for an explicit end date to the bond-buying programme.’

Even so, the Euro is likely to find support in the near term if the German economy demonstrates further signs of robustness.

Thursday’s German gross domestic product data for 2017 as a whole is forecast to show an acceleration in growth from 1.9% to 2.4%, which could be enough to halt the downtrend of EUR exchange rates.

As Carsten Brzeski, Chief Economist at ING, commented:

‘After a weak start to the fourth quarter, the German economy has returned to full speed. With November finally being a month that was not heavily affected by vacation planning or weather, German industry could finally show its real face. However, December data could again be blurred by the Christmas period.

‘Luckily, the guesstimating about the strength of the German economy in the fourth quarter will already come to an end in two days. On Thursday, the German statistical office will continue with its strange habit of releasing GDP growth data for the entire year 2017 without having any hard data from December. It looks very likely that the German economy has had its best performance since 2011 and there is currently very little reason to believe that the strong performance could end any time soon.’

However, the continued bullishness of the US Dollar could prevent the single currency making any major recovery, to the benefit of the GBP EUR exchange rate.

Pound Volatility Forecast With UK Trade and GDP Data in Focus

Despite a better-than-expected BRC like-for-like retail sales report the Pound has struggled to find any particular momentum, even with December sales growth of 0.6%.

Attention is already turning towards Wednesday’s raft of UK production and trade data, though, with forecasts pointing to a widening of the trade deficit in November.

Unless the economy demonstrates signs of greater resilience then GBP exchange rates are likely to remain under pressure, given the level of uncertainty that still surrounds Brexit and the UK’s future relationship with the EU.

The NIESR gross domestic product estimate for the three months to December will also be in focus tomorrow, which may offer the Pound a rallying point.

Growth is thought to have held steady at 0.5%, something which could encourage greater optimism in the economic outlook heading into 2018.

However, if the economy shows any signs of losing momentum then the GBP EUR exchange rate could see a sharp slump.
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