Pound Euro Exchange Rate News: GBP/EUR Weakened as UK Economy Records Zero Growth

April 13, 2023 - Written by John Cameron

STORY LINK Pound Euro Exchange Rate News: GBP/EUR Weakened as UK Economy Records Zero Growth

Pound (GBP) Undermined by Flatlining Economy

The Pound (GBP) came under increased pressure on Thursday morning as the Office for National Statistics (ONS) revealed that the UK economy missed forecasts of a mild expansion and stagnated for the month of February.

Against expectations of a 0.1% increase, the UK’s economy recorded zero growth in February, as a wave of industrial action stemmed growth. Despite a substantial rebound in consumer activity, the strike action from teachers and civil servants weighed heavily on the economy. Despite registering the economy back above pre-pandemic levels, the UK still lags behind all other G7 countries.

However, concerns have returned of whether or not the UK will endure a technical recession this year. Thomas Pugh, economist at RSM UK, said of the situation:

‘It’s more or less a 50:50 call as to whether the UK falls into a technical recession this year, the degree of strike activity may tip the balance. But even if the UK avoids a recession, growth is likely to be meagre through the rest of this year.’

Further weighing on the Pound, is the mixed signals from the Bank of England (BoE). Even before the disappointment of the GDP growth figures, the central bank has been cagey over monetary policy going forward. With BoE Governor Andrew Bailey reassuring the market that the recent banking crisis should not detract from the tightening path, concerns with over-tightening has seen the market split over the BoE’s next move. This uncertainty could be deterring GBP investors.

Euro (EUR) Propped up by Rebounding Industrial Production

Meanwhile, the Euro (EUR) found some modest support in better-than-expected industrial production in the Euro area. With forecasts predicting a 1% growth, the final figure came in 1.5%. The latest figure points to a second consecutive month of growth.

With a strongly rebounding industrial sector last month, it could also point to an overall improvement in the first quarter of 2023. Any further indication that the Eurozone economy could also be on the rebound could cheer investors.

Elsewhere, the Euro was supported by continued hawkish rhetoric from the European Central Bank (ECB). Speaking at the International Monetary Fund (IMF) event, ECB Governing Council member Bostjan Vasle said that the central bank is considering interest rate hikes of 25 and 50bps at the next meeting. Vasle added:

‘Headline inflation is coming down, but we are all focused on core inflation, which is still moving in the wrong direction. This is, of course, not unexpected given the tightness of the labour market and still not fully materialised pass-through effects.’

GBP/EUR Exchange Rate Forecast: Euro to Climb on Weakening US Dollar?

Looking ahead, the Pound Euro exchange rate could see further movement with the negative correlation the Euro shares with the US Dollar. After softer-than-expected inflation, and a significant decrease in PPI, rate hike bets from the Federal Reserve have significantly been reduced. The ‘Greenback’ could slip further, boosting the Euro.

As for the Pound, a speech from BoE policymaker Silvana Tenreyro on Friday could provide a modest impact on Sterling. Renowned for being one of the most dovish members of the Monetary Policy Committee (MPC), any hints at a potential pause from the central bank could weigh on the Pound.

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TAGS: Pound Euro Forecasts