Pound Euro (GBP/EUR) Exchange Rate Narrows as Eurozone Predicted to Avoid Recession

February 13, 2023 - Written by John Cameron

STORY LINK Pound Euro (GBP/EUR) Exchange Rate Narrows as Eurozone Predicted to Avoid Recession

Pound Euro (GBP/EUR) Exchange Rate Narrows amid Upbeat EUR Forecast

The Pound Euro (GBP/EUR) exchange rate narrowed on Monday, as upbeat Eurozone economic forecasts lifted the common currency.

At the time of writing, GBP/EUR traded around €1.277, showing little movement from Monday’s morning rates, but began to edge downward.

Euro (EUR) Bolstered by Upbeat Economic Forecasts

The Euro (EUR) firmed on monday morning, following an upbeat economic forecast from the European Commission (EC).

The EC published their latest economic forecast for the bloc, and outlined that the expected the Eurozone to avoid falling into a recession during 2023. Because of this optimism, it seems that EUR investors were cheered by the news.

Paolo Gentiloni, Commissioner for Economy at the EC, stated: ‘The EU economy beat expectations last year, with resilient growth in spite of the shockwaves from the Russian war of aggression. And we have entered 2023 on a firmer footing than anticipated: the risks of recession and gas shortages have faded and unemployment remains at a record low.’

However, the forecast still outlined potential headwinds that EU households and businesses may face over the year. As such, gains made on the back of the optimistic news may have been capped.

Furthermore, developments in the Ukraine Russia conflict are likely to have further placed a ceiling on the single currency’s gains. Russia stated that their invading forces had managed to gain a few kilometres on the front line, while Ukraine reported to have repelled attacks in several areas.

Pound (GBP) Muted amid Domestic Headwinds

The Pound (GBP) endured muted trade on Monday morning, as a lack of macroeconomic data left Sterling vulnerable to domestic headlines.

BDO, an accountancy and business advisory group, published their latest business trends report. The report found that business optimism had stagnated at the start of the year. The firm further found that all four of its indices tracked – output, optimism, employment and inflation – had all fallen in tandem.

Ed Dwan, a partner at BDO, stated: ‘A net decline across the Optimism, Output and Employment Indices, coupled with historically high levels of inflation, suggests the outlook still remains bleak for businesses, with hiring intentions at their lowest levels in over a year and ever-increasing economic headwinds driving threats of a recession.’

Because of the sombre news, GBP investors appeared to have little reason to support Sterling during Monday’s morning trade.

Further weighing on the Pound could have been a cautious market mood. As an increasingly risk sensitive currency, Sterling may have been capped by risk averse trade.

Pound Euro (GBP/EUR) Exchange Rate Forecast: UK Labour Data in Focus

Looking ahead for the Pound (GBP), Tuesday brings a spate of unemployment data for December. The unemployment rate is forecast to remain at 3.7%, which could point to a tight labour market. In conjunction with the forecast of a fall in wage growth, it may add further impetus for the Bank of England (BoE) to continue with their current path of tightening.

Because of this, GBP could strengthen on an increase in rate hike bets amongst investors. However, the fall in wage growth may dampen the mood by pointing to increasingly harsh conditions for UK workers, as pay struggles to keep up with inflation.

With this being a key point of discussion among unions and trade ministers, it could fuel further anxieties over continued strike action in the UK.

For the Euro (EUR), Tuesday is set to be lacking in significant data releases. Second estimates for the Eurozone’s GDP data for the fourth quarter are due to print. If they show significant deviation from previous figures, EUR could strengthen if they point to a healthier economy, or weaken if they show contraction.

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TAGS: Pound Euro Forecasts