GBP/EUR Exchange Rate Falls on Upbeat Eurozone Economic Surveys

January 23, 2018 - Written by John Cameron

STORY LINK GBP/EUR Exchange Rate Falls on Upbeat Eurozone Economic Surveys

Upbeat ZEW Economic Surveys Bolster EUR Exchange Rates

The Euro (EUR) benefited from a run of upbeat data releases on Tuesday, with the ZEW indicator of economic sentiment for the Euro Area rising to 31.8 in January, up from 29 in December.

This marked the highest reading in six months, with 58.8% of analysts surveyed expecting no changes in economic activity over the next quarter, 36.5% expecting improvement and a tiny 4.7% expecting conditions to worsen.

Germany’s ZEW sentiment reading also proved robust, with the sentiment score rising by 3 points to 20.4 (the highest reading since May), up from the previous period’s 17.4 and the forecast of 19.

ZEW President and Professor Achim Wambach shared his thoughts on the readings, stating:

‘Private consumption, which was the most important driver of economic growth in 2017, is likely to continue to stimulate growth in the coming six months according to the survey participants’.

This positivity was also underlined by the fact that the survey took place before Germany’s Social Democrats (SPD) had voted to begin formal coalition talks with Chancellor Angela Merkel’s Conservatives (CDU) - a time when political uncertainty was extremely high.

Pound Euro (GBP/EUR) Exchange Rate Encumbered by IMF Growth Forecast

Sterling’s recent climb may represent its longest winning streak since the vote to Brexit, but divorce concerns continue to maintain their grip on the Pound based on economic uncertainty for the years ahead.

The International Monetary Fund (IMF) caused a stir yesterday by downgrading the UK’s economic growth forecast, expecting growth of 1.6% this year, down from the previous forecast of 1.7%.

The fund also predicted a drop to 1.5% next year.

IMF Chief Christine Lagarde has asserted that uncertainty regarding the Brexit process is causing various firms to delay investment plans, also pointing to rising inflation and stagnant wage growth as the primary causes for concern.

Lagarde stated:

‘The UK is losing out as a result of higher inflation, pressure on wages and incomes and delayed investment. If you look at investment alone, with 2.1% of GDP in investment, with the global economy as it is, and the space the UK economy has in that global economy, it should be rolling at 6%’.

This downgrade hurt the GBP/EUR exchange rate, temporarily shifting this pairing back into the Euro’s favour.

GBP/EUR Exchange Rate Forecast: Volatility Likely on UK Wages and ECB Decision

The Pound Euro (GBP/EUR) exchange rate could encounter volatility as the week progresses depending on the result of two pertinent events; Wednesday’s UK earnings figures and Thursday’s European Central Bank (ECB) monetary policy decision.

Markets are currently expecting November’s average weekly earnings in the UK to remain steady at 2.5%, with the ‘excluding bonus’ figure also forecast to hold at growth of 2.3%.

A deviation above or below-forecast could have massive implications on the Pound, however, with a drop liable to reveal increased pressures on households and a better-than-expected rise liable to ease said pressure.
Moving into Thursday, markets will be keen to assess the ECB’s latest monetary policy decision, particularly the accompanying comments from President Mario Draghi.

Whilst markets do not expect a rate hike at this meeting, many are weighing up the possibility that the central bank will adjust the wording of its accompanying statement.

If the statement adjustment proves upbeat then GBP/EUR could come under pressure.

If the statement (or remarks) acknowledge limp inflation levels in the bloc, or indeed other causes for concern, then the GBP/EUR exchange rate could rally once again.

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TAGS: Euro Pound Forecasts