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GBP/EUR Forecast: Pound to Euro Exchange Rate Shored up as Monthly UK GDP Jumps

May 12, 2021 - Written by Frank Davies

Pound (GBP) Exchange Rates Rally as Monthly UK GDP Betters Forecast

The Pound to Euro (GBP/EUR) exchange rate extended its uptrend on Wednesday as the monthly UK gross domestic product reading bettered forecasts.

As growth jumped 2.1% on the month in March this helped to encourage hopes of a stronger second quarter growth rebound to come.

Although the first quarter GDP still showed a -1.5% contraction this was not enough to weigh down demand for the Pound at this stage.

Investors choose to continue focusing on the prospect of a second quarter recovery, especially as markets continued to brace for the next phase of easing in national lockdown conditions.

A smaller-than-expected March trade deficit also offered support to the Pound, with the underlying signs pointing towards a more resilient UK economy.

Euro (EUR) Exchange Rates Under Pressure Thanks to Eurozone Industrial Production Miss

While the finalised German inflation rate confirmed that inflationary pressure had risen to 2% on the year in April this failed to boost the Euro.

EUR exchange rates instead came under pressure as a result of March’s disappointing set of Eurozone industrial production data.

Markets were discouraged as production picked up only 0.1% on the month, an increase significantly overshadowed by February’s sharp -1.2% decline.

All in all, this suggests that the manufacturing sector did not perform as well as hoped at the end of the first quarter, leaving the Euro to trend lower against its rivals.

A sharp increase in US inflation also put pressure on the Euro at this stage, with the strengthening US Dollar dragging it lower thanks to the negative correlation of the EUR/USD exchange rate.

GBP/EUR Exchange Rate Forecast: Signs of Central Bank Dovishness to Limit Pound Appeal

With fresh UK data releases lacking ahead of the weekend, though, the Pound to Euro exchange rate may struggle to hold onto its positive footing.

The appeal of the Pound could weaken in response to the latest commentary from Bank of England (BoE) Governor Andrew Bailey, with markets expecting another relatively dovish message.

As long as the BoE looks prepared to maintain its cautious policy outlook for the foreseeable future the potential for any fresh Pound gains could prove limited at best.

On the other hand, the Euro could weaken on Friday with the release of the European Central Bank’s (ECB) latest set of meeting minutes.

Another set of dovish minutes could see the Euro losing fresh ground against its rivals ahead of the weekend, with interest rates looking set to remain on hold for some time yet to come.
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