UK GDP Data Fails to Dent Best Pound to Euro Exchange Rate in 22 Months

June 12, 2024 - Written by John Cameron

STORY LINK UK GDP Data Fails to Dent Best Pound to Euro Exchange Rate in 22 Months

The Euro has stabilised in markets, although there is still an important element of political uncertainty surrounding France. Meanwhile, there was a muted reaction to the latest UK GDP data.

The Pound to Euro (GBP/EUR) exchange rate has maintained a strong tone and close to 22-month highs around 1.1865.

According to the ONS, UK GDP was unchanged in April after a 0.4% increase the previous month and in line with consensus forecasts.

There was a significant impact from adverse weather conditions during the month.

There was a 0.9% decline in industrial production for the month while construction reported a 1.4% decline, the third successive contraction.

There was a 0.2% increase for services despite weather-related weakness in retail sales.

GDP increased 0.7% in the three months to April compared with the previous quarter.

Investec’s Philip Shaw commented; “We consider though that April’s numbers represent a blip in the recovery story rather than the start of a new downturn and that activity will crank up a gear or two over the coming months as the special negative factors disappear.”

RSM UK chief economist Tom Pugh took a similar view; “The weakness in April is just a small bump in the road. Interest rate cuts are likely to come in the summer, growth should continue in the first half of this year, and pick up further after the summer and into 2025. Indeed, we’re expecting growth to average 0.3% q/q over the next year, a much stronger performance than the last five.”

He added; “Overall, today’s data reinforces our view that Q4 last year will represent the nadir of a particularly painful period of stagnation for the UK economy.”

The National Institute of Economic and Social Research was still cautious over underlying conditions; “the broader perspective remains an economy grappling with stagnation as low productivity and high economic inactivity curtail growth potential. Structural reforms and policies to boost public and private investment should be the focus for the next government, to enter a new era of higher economic growth.”

Paul Dales chief UK economist at Capital Economics, noted the political dimension; “The stagnation in GDP in April doesn’t mean the economic recovery has been extinguished, but it’s hardly great news for the Prime Minister three weeks ahead of the election.”

Markets will also continue to monitor Euro-Zone developments with a particular focus on France and parliamentary elections at the end of June.

ING commented; “A little calm seems to have returned to French government bond markets, where 10-year yields ended yesterday some 10bp off the intra-day highs. We do not think we've seen the last of the stress here, but for today the attention switches squarely to the US.

ING looked in detail at French narrative and noted; “we concluded that the risks - including a collision course between the European Commission's budgetary controls and a potential right-wing government - could keep investors nervous. In fact, current French Finance Minister, Bruno Le Maire, has been keen to warn of a Liz Truss-style debacle in French bond markets should Marine Le Pen's far-right party gain a majority in the elections.”

It added; “Expect markets now to take notice of opinion polls - where larger leads for Le Pen's party will be seen as a euro negative.”

MUFG considers that the most likely outcome is a that there will be further deadlock with no block able to secure a majority.

It added; “the prospect of a further increase in the political risk premium priced into the euro remains high with even the current most plausible best-outcome looking like some degree of hung parliament. That’s a bad outcome especially coupled with increased power for RN.”

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TAGS: Pound Euro Forecasts