GBP/EUR Forecast: Pound to Euro Exchange Rate Limited as UK GDP Contracts Less-Than-Expected

March 12, 2021 - Written by John Cameron

STORY LINK GBP/EUR Forecast: Pound to Euro Exchange Rate Limited as UK GDP Contracts Less-Than-Expected

The Pound to Euro exchange rate is rangebound today as GDP data released from the UK shows that the economy shrank less than forecast in January.

At the time of writing the pair are currently trading at around 1.1681, as the Euro received support this morning as industrial production figures unexpectedly turned positive and German inflation data met forecasts.

Pound Sterling (GBP) Exchange Rates Slip as UK GDP Contracts 2.9%

The Pound dipped this morning, although GBP/EUR is trading in a narrow range, as UK GDP shrank 2.9% in January, less than the 4.9% forecast.

The contraction comes as the UK was plunged into a third national lockdown at the start of January to help combat the third, more deadly wave of the coronavirus pandemic.

Chancellor Rishi Sunak spoke on the contraction of UK GDP:

’Today’s figures highlight the impact the pandemic continued to have on our economy at the start of the year as we tackled the new variant of the virus.’

‘But we also have reasons to be hopeful- we have set out a clear roadmap out of the pandemic, the NHS has vaccinated over 23 million people and my Budget last week set out our three part plan to protect the jobs and livelihoods of the British people.’

However limiting the Pound’s gains this morning is the news that exports to the EU slumped by 40.7% in the first month following the Brexit deal.

Yael Selfin, Chief Economist at KPMG UK commented on the data, saying:

‘January saw a staggering 40.7% fall in exports to the EU as the Brexit related disruption coincided with restrictions caused by new COVID variants. In comparison, trade with non-EU countries grew by 1.7% pointing to Brexit as the likely culprit, as intense stockpiling in December 2020 brought some trade flows ahead of the Brexit deadline.’

Euro (EUR) Exchange Rate Supported by Industrial Production and German Inflation

The Euro has been supported this morning as inflation data from Germany showed an acceleration to 1.3% in February, the highest rate since March 2020 and back at pre-pandemic levels.

As reported by the Federal Statistics Office:

‘After the end of the temporary lowering of VAT rates at the turn of the year, the inflation rate has almost reached the pre-crisis level for the second month in a row. Consumer prices rose by 0.7% compared to January 2021.’

The Euro has found any gains limited however as the recent rally of the US Dollar (USD) has pushed down demand for EUR.

Even more so the continuing lag in vaccination rollout across the Eurozone has caused investors to worry as Italy, Denmark, Norway and Iceland have suspended the rollout of the AstraZeneca vaccine over concerns the vaccine causes blood clots, a claim refuted by the EU’s medicines regulator.

The Euro was however supported by Eurozone industrial production figures, which were better than forecast and the reading of 0.8% took production into growth territory.

GBP/EUR Exchange Rate Forecast: BoE Interest Rate Decision in Focus

Euro traders will be looking towards the German ZEW Economic Sentiment index for March with economic sentiment forecast to have improved which will likely support EUR exchange rates.

Heading into next week, Euro investors will be keeping an eye on key inflation data from the Eurozone which is forecast to hold steady at 0.9%, but any surprises could drive additional movement for EUR.

For Pound investors, the latter half of the week brings the Bank of England’s (BoE) interest rate decision, which is expected to remain at 0.1% and the central bank will maintain monetary policy to continue supporting the UK’s economic recovery.

Any optimistic commentary surrounding the UK economy in the Bank of England’s decision would push the Pound higher.

The GBP/EUR exchange rate will continue to be moved by any further coronavirus developments, with anymore countries in the Eurozone suspending vaccinations adding pressure to the single currency.

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TAGS: Pound Euro Forecasts