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Pound Euro Exchange Rate News: GBP/EUR Falls to Fresh Five-Month Low amid UK Recession Fears

May 6, 2022 - Written by John Cameron

GBP/EUR Drops to Fresh Five-Month Low

The Pound Euro (GBP/EUR) exchange rate is losing ground today after the Bank of England’s (BoE) economic forecasts sparked UK recession fears.

At the time of writing, the GBP/EUR exchange rate is trading at approximately €1.1668, down roughly 0.5% from today’s opening levels.

Pound (GBP) Continues to Fall Following BoE’s Bleak Market Forecasts

The Pound (GBP) is tumbling against the Euro (EUR) today, extending yesterday’s losses after the BoE revealed its latest interest rate decision.

On Thursday, the BoE raised interest rate to a 13-year high of 1%. Although this was largely priced-in, the markets were surprised as three of the nine-strong Monetary Policy Committee voted for a 50-basis point hike.

In spite of the hawkish surprise, the BoE’s accompanying economic forecasts have placed significant pressure on GBP exchange rates.

BoE policymakers have warned inflation may reach 10% before the end of the year exacerbating the UK’s cost of living crisis.

The BoE also signalled the UK could be at risk of a recession as its forecast growth in the last quarter of 2022 is likely to shrink.

However, BoE Governor Andrew Bailey has defended the bank’s cautious approach to tightening its monetary policy.

Bailey stated:

‘I think it’s important to put that into the context of the shock that we’re seeing.

‘We’re seeing this unprecedentedly large shock to real income in this country coming from abroad, it’s a terms of trade shock. ...And that is having a negative effect on real income, we think that’s going to feed through to activity during the course of this year in a big way.

‘We think the impact of this shock in terms of pushing down activity, pushing down inflation is going to be much bigger. And therefore, how we, sort of, calibrate the monetary policy needs to take that into account.’

Euro (EUR) Climbs Despite Weak German Industrial Production

The Euro (EUR) is rising against the Pound (GBP) today in spite of Germany’s latest industrial production falling short of predictions.

In March, industrial production contracted by 3.9%. This is down from a 0.1% slump in February and significantly below market expectations of a 1% decline.

This is the largest decline since April 2020 at the start of the Covid pandemic

At present, companies are still facing issues with order processes and supply chain disruptions. This has been further heighted by the Ukraine crisis.

A report from Destatis, the Federal Statistical Office of Germany, stated:

‘Many enterprises still have problems completing their orders because of interruptions in supply chains, which is due to continuing Covid-19 crisis restrictions and the war in Ukraine.

‘Just over 80% of the industrial enterprises surveyed complained of bottlenecks and problems in procuring intermediate products and raw materials in March 2022, according to the Ifo Institute for Economic Research.

‘That was almost as many as in December 2021, when a record high of just under 82% had been reached.’

In spite of this, the Euro Is drawing support against the majority of its peers this morning amidst a risk-off mood.

GBP/EUR Exchange Rate Forecast: Will Germany’s ZEW Economic Sentiment Dent EUR?

Looking ahead, the Pound Euro exchange rate may be supported at the start of next week by the release of Germany’s latest ZEW economic sentiment index.

In May, the indicator is expected to slip marginally from -41 to –42, potentially placing pressure on EUR exchange rates.

On the other hand, the Pound is likely to remain influenced by the BoE’s economic forecasts and UK politics The Conservatives’ losses in the local elections could further undermine Boris Johnson’s premiership.

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