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Euro to Pound (EUR/GBP) Exchange Rate Sinks despite a Dovish Outlook from the European Central Bank

September 30, 2020 - Written by John Cameron

EUR/GBP Exchange Rate Falls as Covid-19 Darkens Eurozone’s Economic Outlook

The Euro to Pound (EUR/GBP) exchange rate fell today, with the pairing currently trading around £0.910.

The Euro (EUR) fell against the Pound (GBP) after Christine Lagarde, the President of the European Central Bank (ECB), expressed concerned over inflation.

Yohay Elam, an analyst at FXStreet, explains:

‘The ECB is worried about weak consumer prices after preliminary German Consumer Price Index figures showed ongoing softness. Will the Frankfurt-based institution add to its stimulus? While the head of the ECB is pushing in that direction, the hawks are ready to fight back. The northern members of the Eurozone are wary that the bank loses its independence by financing governments. Nevertheless, Lagarde has the last words and she is lowering the Euro.’

In Eurozone economic data, today saw the release of Germany’s Retail Sales report for August beat forecasts and rise from -0.2% to 3.1% month-on-month.

Today also saw the release of Germany’s Unemployment Rate figure for September fall unexpectedly from 6.4% to 6.3%.

Michael Nienaber, an analyst at Reuters, commented on the data:

‘German retail sales rose much more than expected in August and unemployment fell further in September, boosting hopes that household spending in Europe’s largest economy will power a strong recovery in the third quarter from the coronavirus shock.’

Pound (GBP) Rises despite UK GDP Falling to Record Lows in Second Quarter

Sterling benefited from a speech from the Bank of England’s (BoE) Chief Economist, Andy Haldane, who was more bullish than expected, saying:

‘We now expect GDP to be around 3-4% below its pre-Covid level by the end of the third quarter. In other words, the economy has already recovered just under 90% of its earlier losses.’

As a result, GBP investors have now become cautiously optimistic about Britain’s economy, with the BoE effectively having ruled out negative interest rates – for now.

In UK economic news, today saw the release of the latest UK GDP figure for the second quarter, which fell by -19.8%. As a result, Sterling traders are becoming increasingly worried for the British economy, with growth having fallen to record lows in Q2.

Ruth Gregory, an analyst at Capital Economics, was also downbeat, saying:

‘The renewed COVID-19 restrictions will probably mean that GDP stagnates in Q4, leaving economic activity marooned 5.5% short of its pre-crisis level.’

‘And the risk now is that renewed containment measures send the recovery into reverse.’

EUR/GBP Forecast: Could a Brexit Breakthrough Buoy the Pound This Week?

Euro (EUR) investors will be looking ahead to tomorrow’s EU Leaders Special Summit. Any signs that the Eurozone’s economy is falling behind as Covid-19 wracks much of Europe would prove EUR-negative.

Tomorrow will also see the release of the Eurozone’s Unemployment Rate for August. If this confirms consensus and rises to 8.1%, then the single currency could shed some of its gains.

Pound (GBP) traders will be awaiting tomorrow’s release of September’s UK Markit Manufacturing PMI. If this improves, then we could see Sterling rise.

The GBP/EUR exchange rate will, however, remain sensitive to the UK’s coronavirus and Brexit developments. If UK-EU Brexit talks go well, with Downing Street willing to compromise on a post-Brexit trade deal, then we could see Pound rise against the Euro.

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