Pound Euro (GBP/EUR) Exchange Rate Slides as UK Government Deficit Widens

December 21, 2022 - Written by John Cameron

STORY LINK Pound Euro (GBP/EUR) Exchange Rate Slides as UK Government Deficit Widens

Pound Euro (GBP/EUR) Exchange Rate Slides as UK Government Borrowing Soars

The Pound Euro (GBP/EUR) exchange rate weakened on Wednesday, as UK government borrowing increased far beyond forecasts and indicated a slowdown in investment.

At the time of writing, GBP/EUR traded at around €1.1404, a drop of roughly 0.6% from Wednesday’s opening rates.

Pound (GBP) Struggles as Government Borrowing Soars

The Pound (GBP) weakened on Wednesday, as UK government borrowing printed far beyond forecasts.

The figure was forecast to print at -£13 billion, and printed at £-22 billion, widening the Government’s borrowing deficit substantially. However, the borrowing was broadly due to the programmes enacted to assist businesses and households during the cost-of-living crisis, with a specific focus on preventing energy bills from spiralling further.

However, the data also pointed to a slowdown in government investment, prompting fears from analysts that the UK economy may struggle further without growth assistance from the Government.

Alison Ring, Public Sector and Taxation Director for the Institute of Chartered Accounts (ICAEW), expanded further. She stated: ‘Chancellor Jeremy Hunt will be relieved that the deficit for the year-to-date only exceeded £100bn by £5bn, on track to stay within the Office for Budget Responsibility’s latest forecast of £177bn for the full year. The continued slow-down in public capital investment is concerning given its importance to economic growth prospects and future tax revenues, compounded by continued disruption from industrial action.’

The worries over the UK’s economic outlook were enough to negate a surprise uptick in retail sales for December. The Confederation of British Industry released their latest sales data, showing a sharp increase from -19 to 11, far above forecasts of -23.

Euro (EUR) Bolstered by Recovering German Consumer Sentiment

The Euro (EUR) ticked upwards on Wednesday, as an increase in German consumer sentiment served to bolster the single currency against most peers.

As the bloc’s largest economy, positivity from consumers is hoped to represent a wider pattern across Europe, or at least bring a sense of optimism for other countries within the territory.

Consumer sentiment rose to -37.8 heading into January, up from -40.1 in December and above expectations of -38.

While still reflecting a drop in consumer spending, the improvement represents decreasing pessimism for German consumers.
Rolf Burkl, the GfK Consumer Expert, explained further. He stated: ‘The measures taken by the federal government to mitigate skyrocketing energy costs are apparently having an effect. However, it is still too soon to give the all-clear. The recovery of the consumer sentiment, as we are currently experiencing, is still on shaky ground. For example, if the geopolitical situation were to worsen again, leading to significantly higher energy prices, the light at the end of the tunnel would very quickly become dimmer again or even go out altogether.’

Pound Euro (GBP/EUR) Exchange Rate Forecast: Domestic Headlines to Shape Pairing?

Looking ahead for the Pound Euro exchange rate, trading conditions are going to remain thin on the ground in the run up to the holiday season.

Neither side of the pairing is due to see any substantial macroeconomic data, meaning that other factors may come into play.

For the Euro, the currency’s negative correlation with the US Dollar (USD) could bring gains if the risk-on market impulse continues. However, should a shift occur to risk averse trade, the safe-haven flows to the ‘Greenback’ could see the Euro struggle.

For the Pound, continuing industrial action may remain a pressure for Sterling. With industrial action showing little sign of stopping across many sectors in the UK, investors may grow increasingly concerned about the impact this may have on the economy and political situation.

Elsewhere, risk-appetite may bring support to the Pound due to it’s increasingly risk sensitive nature. With the Euro being a safer currency, this may strengthen the pairing.

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