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Pound Euro Exchange Rate News: GBP/EUR Trades Erratically amid Downbeat Eurozone Data

August 1, 2022 - Written by John Cameron

The Euro (EUR) Subdued as Downbeat Data Exacerbates Recession Fears

The Euro (EUR) is struggling to find demand today as downbeat data compounds growing inflationary pressures.

German retail sales unexpectedly declined in the month of June, as they missed forecasts of a 0.2% increase. Rising living costs are having a direct impact on consumer’s ability to spend. With the largest drop in clothing with a 5.4% decrease, and food sales also dropped substantially by 1.6%. Overall, retail sales fell by 8.8% on the year, the biggest drop since records began in 1994.

Elsewhere, the final PMI figures for both manufacturing also continued to paint a bleak picture in Europe, and in particular Germany, Europe’s biggest economy. The manufacturing sector confirmed to have contracted in the month of July, printing at 49.8, but slightly above forecasts of 49.6. A second month of decline is the fastest since May 2020. More concerning is that outside of the Covid lockdown periods, the drastic drop in factory output hasn’t been seen since December 2012.

Meanwhile, the growing threat of a gas crisis come winter is weighing further on the Euro. The latest concerning news is that Gazprom, Russia’s state-funded energy supplier, has cut supplies to Latvia. Accusing the European nation of violating conditions of purchase, Latvia has become the latest nation to suffer as Russia’s prolonged invasion of Ukraine continues to weigh on the global economy.

However, Lending some much-needed support to the Euro is the increased chances of a 50bps rate hike at the next European Central Bank (ECB) policy meeting. Analysts at JP Morgan claim that they expect the central bank to rate high now, and then take a pause:

‘There is no doubt in our mind that the ECB at its next meeting on 8 September will revise its inflation projections considerably higher whereas it is less likely that there will be sufficient information - short of a gas rationing shock - to change significantly the growth forecast.’

Pound (GBP) Holds Ground Despite Mounting Inflationary Pressures

The Pound (GBP) is finding some modest strength today despite a lack of data leaving the currency wide open to a downbeat market mood.

The cost-of-living crisis continues to weigh on the UK, with more than one in eight households fear they won’t be able to make ends meet ahead of the sharp rise in energy prices coming in Autumn. Almost half of all UK households are increasingly worried about not being able to afford rental or mortgage payments over the next year.

The mounting pressure on UK households comes as recession fears loom. With inflation expected to hit double figures this autumn, surging food and fuel prices has already pushed the cost-of-living crisis further, with the worst yet to come. Nigel Wilson, Chief Executive of Legal & General said:

‘Many households across the UK are currently facing very tough financial choices. For some, those choices seem impossible.

‘However, what is most concerning is that the impact of the cost of living crisis is being felt more severely in some parts of the UK than in others. This threatens to widen the existing demographic and geographic inequalities that the levelling up agenda was designed to address.’

Elsewhere, Conservative leadership hopeful, Rishi Sunak has pledged a 20% tax cut by the end of the decade as he attempts to win over the Tory party. With the favourite, Liz Truss, looking set to replace Boris Johnson, Sunak came out swinging as he attempts to claw back lost ground in the race. Sunak warned the Conservative party of ‘self-sabotage’ of siding with Truss and her ‘fantasy economics’.

The ongoing political uncertainty surrounding the Conservative and UK leadership race will likely weigh on the Pound. Investors remain cautious as to how both candidates’ fiscal policies could lead the UK out of economic turmoil without sinking it further.

GBP/EUR Exchange Rate Forecast: Hawkish BoE to Bolster the Pound?

With data remaining thin on the ground for the Pound Euro exchange rate on Monday, all eyes will be on the Bank of England (BoE) interest rate decision on Thursday. If expectations of a 50bps hike are true, Sterling could see a much-needed boost.

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