Pound Euro (GBP/EUR) Exchange Rate Rallies as UK Economy Rebounds

March 10, 2023 - Written by John Cameron

STORY LINK Pound Euro (GBP/EUR) Exchange Rate Rallies as UK Economy Rebounds

Pound Euro (GBP/EUR) Exchange Rate Rallies as UK Economy Rebounds

The Pound Euro (GBP/EUR) exchange rate rallied on Friday morning, following the news that the UK’s economy had expanded by 0.3% in January.

At the time of writing, GBP/EUR traded at around €1.1323, a rise of roughly 0.5% from Friday’s opening rates.

Pound (GBP) Rallies as UK Economy Rebounds

The Pound (GBP) rallied on Friday morning, following the release of the latest GDP data for the UK. January’s monthly reading printed above economists’ forecasts, showing that the economy had expanded by 0.3% on a monthly basis, versus the expected 0.1% growth.

Because of this, GBP investors appeared to be cheered by the sense of economic optimism, and the hopes that the UK may have managed to avoid a technical recession for the time being.

However, the yearly picture was more ambiguous, and indicated that the UK’s economy had stagnated over the past year.

Paula Bejarano Carbo, Associate Economist at NIESR, explored the data. She stated: ‘While this appears to be good news for the UK economy, the broader picture is more ambiguous: GDP was flat in the three months to January relative to the previous three months and also flat compared to January 2022.’

As such, the Pound’s gains may have been capped by the uncertainty over the future of the UK’s economic outlook. Berenberg Bank, for instance, adjusted their projections for the UK’s economy in 2023. They now expect the economy to contract by 0.1%, as opposed to 0.5%.

However, as the Bank of England (BoE) remains focused on inflation related data, the apparent resilience of the UK’s economy may have brought further impetus for interest rate hikes. With this in mind, GBP investors may have moved to support Sterling as they increase their rate hike bets.

Euro (EUR) Muted despite Elevated Rate Hike Bets

Meanwhile, the Euro (EUR) traded quietly on Friday morning, as a lack of impactful data releases kept EUR relatively muted.

However, the common currency was likely underpinned by elevated rate hike bets. Throughout the week, European Central Bank (ECB) policymakers have reiterated the central bank’s hawkish stance towards inflation, calling for further rate hikes beyond March’s priced in 50bps hike.

Furthermore, Friday morning’s final German inflation data likely reinforced these bets. The reading showed no change to the preliminary figure, meaning that the Eurozone’s largest economy is still battling inflation at 8.7%.

With this figure likely being representative of the bloc’s inflation figures as a whole, the need for tightening remained apparent to the European Central bank.

However, recent developments in the Ukraine Russia war likely capped the common currency’s appeal on Friday. Recently, Russia has been shelling Ukraine with more sustained missile strikes, with at least 80 missiles striking key infrastructure.

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

Looking ahead to early next week for the Pound (GBP), Tuesday sees the release of January’s unemployment and wage growth data. Currently, economists forecast the unemployment rate to have risen from 3.7% to 3.8% in January, while wage growth is expected to have fallen.

If both sets of data print as forecast, GBP may be weakened as it could point to a loosening labour market, and with wages being pointed to as a key catalyst for inflation, it may remove the need for further jumbo rate hikes from the Bank of England (BoE).

Elsewhere, domestic headlines are likely to play a role in shaping Sterling rates. With industrial action discussions appearing to be making some headway, any news of further negotiations or cancellations of strikes could contribute a tailwind to GBP.

For the Euro, data is thin on the ground at the start of next week. Because of this, risk appetite and the single currency’s negative correlation to the US Dollar is likely to drive EUR exchange rates.

If markets continue to remain in a downbeat mood, the safe Euro could draw safe-haven flows and firm against riskier assets such as the Pound.

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TAGS: Pound Euro Forecasts