February 13, 2019 - Written by Frank Davies
STORY LINK Pound Sterling Euro (GBP/EUR) Exchange Rate Pushes Higher as Eurozone Production Slides
Pound Sterling Euro (GBP/EUR) Exchange Rate Benefits as Eurozone Production Slumps
As Eurozone industrial production slumped -4.2% on the year in December this helped to boost the Pound Sterling to Euro (GBP/EUR) exchange rate on Wednesday.
With production falling at its fastest pace since the financial crisis, following on from weak French and Italian data, confidence in the Euro naturally diminished.
Commenting on the data Bert Colijn, Senior Economist at ING, noted:
‘Trade wars, emission standard related production delays, yellow vest movements and slowdowns in emerging markets have all played a part in the weakening of production over recent months, causing two quarters of declining production.’
This weak showing exacerbated worries over the economic outlook of the currency union, with the European Commission having already lowered its growth forecasts for 2019.
Fresh political turmoil in Spain also put a dampener on the single currency, with the rejection of the government’s 2019 budget increasing the odds of an early general election.
Underwhelming UK Inflation Limits Pound Sterling (GBP) Exchange Rate Momentum
However, the GBP/EUR exchange rate’s gains were ultimately limited thanks to the underwhelming nature of January’s UK consumer price index data.
While markets had anticipated an easing in inflationary pressure the dip from 2.1% to 1.8% on the year still caught investors off guard.
As the inflation rate is now below the Bank of England’s (BoE) 2% target the case for tighter monetary policy has diminished further.
With the BoE looking increasingly set to remain on hold in the near term, barring any action in the wake of Brexit, the mood towards the Pound soured.
Reports that the UK government is struggling to roll over all of its existing EU trade deals with other countries put additional pressure on the GBP/EUR exchange rate on Wednesday afternoon.
Weakening German Growth to Weigh on Euro (EUR) Exchange Rates
Fresh losses are likely for the Euro on Thursday, however, with the release of the fourth quarter German gross domestic product data.
As forecasts point towards the Eurozone’s powerhouse economy continuing to lose momentum on the year EUR exchange rates look set to extend their downtrend further.
Particular focus will fall on the quarterly growth rate, with investors hoping to see that the German economy returned to a state of growth after the -0.2% contraction seen in the third quarter.
If Germany fails to avoid a second consecutive quarter of contraction and falls into a state of recession, though, the Euro could see a significant slump across the board.
UK Retail Sales Rebound to Support GBP/EUR Exchange Rate
While Brexit developments look set to dominate the movement of the Pound in the days ahead the GBP/EUR exchange rate could still benefit from Friday’s UK retail sales data.
After December’s slump in sales investors are looking for a solid rebound on the month, improving the outlook of the retail sector.
Signs that consumers are shrugging off the increasing sense of uncertainty surrounding Brexit may give the Pound a solid boost against its rivals.
Evidence of increasing consumer caution, on the other hand, would leave the GBP/EUR exchange rate exposed to downside pressure as confidence in the economic outlook diminishes.
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TAGS: Pound Euro Forecasts