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Pound Euro (GBP/EUR) Exchange Rate Sinks as UK GDP Contracts

June 13, 2022 - Written by John Cameron


GBP/EUR Exchange Rate Weakens on GDP Shock

The Pound Euro (GBP/EUR) exchange rate is sliding down this afternoon, following a weak GDP release from the UK this morning. Against its other peers, the Euro (EUR) is also succumbing to some downside amidst a lack of EU data.

At the time of writing, GBP/EUR is trading at €1.1651, down 0.5% from today’s opening levels.

Pound (GBP) Depressed by April’s Economic Data

The Pound (GBP) is trending lower against the majority of its peers today as disappointing GDP data weighs upon the currency. The economy shrank by 0.3% in April rather than expanding as expected.

The data shows that all three of the main economic sectors contributed negatively to the release, for the first time since January 2021: services fell by 0.3%, production by 0.6% and construction by 0.4%.

April saw a large decrease in human health and social work in particular, as there was a significant reduction in the use of NHS Test and Trace services. According to Darren Morgan, director of economic statistics at the ONS:

‘Manufacturing also suffered with some companies telling us they were being affected by rising fuel and energy prices.’

Other analysts are worried that today’s data may foreshadow a recession. Yael Selfin, chief economist at KPMG UK, says April’s fall in output is unlikely to be short-lived as the squeeze on consumer income is expected to weaken demand further.

Meanwhile, the Labour party have labelled the fall in GDP as ‘really worrying’, criticising the Conservatives’ reluctance to ‘address structural difficulties’.
The Tory party faces additional scrutiny today as it unveils its Northern Ireland Protocol Bill, which overrides parts of the protocol. So far, 52 out of 90 members of Northern Ireland assembly have rejected the bill 'in the strongest possible terms'.

Euro (EUR) Trades Mixed on Hawkish ECB

The Euro has traded in a mixed range through today’s session so far, as a lack of significant data leaves the single currency to trade on external factors.

Feelings remain conflicted over the European Central Bank (ECB)’s comparatively hawkish stance: a commitment to raising interest rates suggests inflation will be reduced and lends upside - yet analysts continue to worry that tighter monetary policy could trigger a recession.

Seema Shah, chief strategist at Principal Global Investors, warns that the ECB is facing stagflation threats:

‘The strangling hold of desperately high living costs means that euro area growth will slow through the second half of this year, with recession increasingly likely - particularly now with sharp policy tightening in the near-term horizon.’

Furthermore, an inverted US yield curve signals trouble ahead. As 2-year US Treasury bond yields trade above the equivalent 10-year bonds, economists interpret that investors are getting cold feet.

If the US economy experiences a recession, as the data indicates may happen, the effects will ripple through the global economy due to America’s size and influence. The US is the world’s largest economy, followed by China.

GBP/EUR Exchange Rate Forecast: NI Protocol Bill to Influence Trading?

With the UK’s Northern Ireland Protocol bill in the spotlight today on account of its negative reception, its possible that criticism from the European Union may sour relations between the UK and EU, sparking a trade war.

UK opposition parties, in addition to several Conservative spokespeople, argue that the bill advocates a breach of international law – but Prime Minister Boris Johnson refuses to acknowledge that possibility.

If tensions escalate further over the issue, GBP may experience downside, subduing the Pound Euro exchange rate into tomorrow.

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