Pound Euro Exchange Rate News: GBP/EUR Slipped on Downbeat IMF 2023 Assessment

January 31, 2023 - Written by John Cameron

STORY LINK Pound Euro Exchange Rate News: GBP/EUR Slipped on Downbeat IMF 2023 Assessment

Pound (GBP) Undermined by Another Downbeat Economic Forecast

The Pound (GBP) is struggling to catch a break this week, or this year, as Tuesday saw another pessimistic forecast weigh heavily. The International Monetary Fund (IMF) expressed concerns that the UK will be the only G7 economy to shrink in 2023.

Another downgraded prediction further highlights the dire situation the UK finds itself in, as a toxic cocktail of high energy prices, surging interest rates, and higher taxes will continue to exacerbate the cost-of-living crisis. With the rest of the G7 countries all expected to improve or at least remain the same in terms of outlook, the UK is set to worsen. The IMF’s downgraded assessment comes after Chancellor Jeremy Hunt announced tax hikes to plug the ever-growing financial gap in the UK’s finances. The IMF added:

‘With inflation at about 10% or above in several euro-area countries and the United Kingdom, household budgets remain stretched. The accelerated pace of rate increases by the Bank of England and the European Central Bank is tightening financial conditions and cooling demand in the housing sector and beyond.’

Meanwhile, further industrial action weighed on the Pound as thousands of teachers walked out after a decade-long pay squeeze. The walkout in England and Wales will also involve thousands of workers including rail staff and civil servants will mark the single biggest day of strike action in decades. The National Education Union (NEU), has asked for an above-inflation pay rise after inflation reached double digits last year, meaning teachers have seen a 23% drop in real-terms wages since 2010.

Euro (EUR) Buoyed by Better-than-Expected GDP Growth

Meanwhile, the Euro (EUR) enjoyed relative success on Tuesday in the wake of above-forecast GDP data. However, gains were capped with far worse-than-expected retail sales in Germany.

Opening the day, retail sales out of Europe’s biggest economy recorded a 5.3% slump in retail sales, widely missing expectations of a 0.2% climb. The unexpected slump of sales marks the biggest drop in sales since July 2021. YoY and sales fell 6.4% and were 1.9% lower than December 2019. Fears of a recession in Germany are only exacerbated by the latest data.

Elsewhere, providing a much-needed boost was a surprise QoQ growth rate in the Eurozone. Against an expected 0.1% contraction, the economy grew by 0.1% instead in the last three months of 2022. However, despite the surprise expansion, a meagre forecast for 2023 could weigh on the Euro. Ken Wattret, analyst at S&P Global commented on the data:

‘The headline GDP figure gives a misleadingly favourable impression of economic conditions in late 2022.

‘The key takeaway from member states' data is the breadth of weakness in private consumption, with the acute squeeze on household real incomes due to soaring inflation belatedly biting.’

GBP/EUR Exchange Rate Forecast: Eurozone Inflation Rate to Rally the Euro?

Looking ahead, the Pound Euro exchange rate could see further movement with the release of the latest inflation figure for the Eurozone. Despite an expected softening of headline CPI inflation, the fact that the rate remains far above the target level, investors could remain buoyed over increased rate hike bets.

Meanwhile, the Pound will be left open to domestic woes as the calendar remains thin until the interest rate decision on Thursday. A downbeat mood could keep a firm lid on Sterling until then.

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TAGS: Pound Euro Forecasts