Pound Euro Exchange Rate Strengthens as Investors Move to Buy the Dip

Modified: Monday, 7 November 2022 12:35 BST - Written by John Cameron

STORY LINK Pound Euro Exchange Rate Strengthens as Investors Move to Buy the Dip

Pound Euro (GBP/EUR) Exchange Rate Rallies as Investors Buy the Dip

The Pound Euro (GBP/EUR) exchange rate strengthened on Monday as investors moved to buy the dip following on from last week’s crash.

The move saw the GBP/EUR exchange rate rally to around €1.1471 at the time of writing, a rise of roughly 0.4% from Monday’s opening rates.

Pound (GBP) Enjoys Support as Investors Grab Bargain

The Pound (GBP) enjoyed strong support on Monday, as investors moved to buy the dip and flocked to the wounded Sterling.

Following last week’s dramatic plunge wherein GBP was sold off in droves after the Bank of England (BoE) announced that the UK had entered a prolonged recession, Monday brought about an attempted recovery from a period overselling.

Investors grew concerned over the UK’s economic outlook last week following the BoE’s gloomy outlook, with further losses wrought by their dovish policy towards rate hikes.

Elsewhere, further rumours around the UK government’s upcoming budget may have served to buoy Sterling. Monday saw reports circulate that Chancellor Jeremy Hunt is expected to announce over £60 billion in tax raises and spending cuts.

While the return to a more familiar fiscal policy has been welcomed by investors, the £35bn of spending cuts may cap GBP’s gains as investors consider the impact on the UK’s cost-of-living crisis.

This was explored further by James Smith, the developed markets economist at ING Think. He stated: ‘With very limited scope to cut day-to-day spending, we suspect he’ll have to chop back public investment plans and potentially also look at increases to personal taxes.’

Euro (EUR) Mixed as German Industrial Production Data Limits Losses

The Euro (EUR) traded in a mixed capacity on Monday, as German industrial production data for September served to cushion losses.

The data came in at 43.8, above forecasts and above the previews reading of 41.8. While this is below the threshold for growth, it demonstrated a sign of optimism for the sector and served to cushion further losses for the Euro.

Elsewhere, a risk-on market sentiment served to lift the Euro against some peers. The market sentiment soured towards the US Dollar (USD), with the expectation of a dovish pivot from the Federal Reserve.

Furthermore, investors opted to shrug off reports that China would not end their policy of zero-covid, further embellishing the risk-on trade during Monday’s session.

Michael Brown, the head of market intelligence at Caxton, explored this. He stated: ‘The market seems to have rather easily shrugged off the weekend denials from China that zero-covid may soon be over, and continued with the momentum from last week, with the dollar softening as a result of increased bets (misplaced, in my view), that the Fed will soon pivot to a more dovish stance.’

As such, the Euro enjoyed modest support due to the single currency’s negative correlation with the ‘Greenback.’ Generally, if USD weakens, the Euro finds tailwinds.

Pound Euro Exchange Rate Forecast: EU Retail Sales to Dent EUR?

Looking ahead, the core catalyst of movement for GBP/EUR in the short term is likely to be the retail sales figures for the EU.

With another contraction expected the slowdown in consumer spending may wound the single currency by pointing to further economic troubles within the bloc.

Friday brings the release of the UK’s GDP figures. With falls expected in all datasets, Sterling may be dented as the economic outlook for the UK continues to worsen.

Elsewhere, with speeches scheduled throughout the week for policymakers from both Central Banks, investors may be keeping a close eye. Further dovish talk from BoE policymakers may weaken Sterling, while further hawkish rhetoric from ECB officials may buoy the Euro.

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TAGS: Pound Euro Forecasts