GBP/EUR Exchange Rate Drops -0.5% after Gloomy UK Economic Forecasts

May 30, 2018 – Written by Ben Hughes

On Tuesday, the Pound to Euro exchange rate (GBP/EUR) opened around 1.1448 and closed slightly higher at 1.1487.

Poor Predictions for UK Economy Cause GBP/EUR Exchange Rate Losses

The Pound has struggled against the Euro today, falling by -0.5% in the pairing. A lack of solid UK economic data has worsened the situation, with negative news having an amplified effect.

Sterling has been devalued by statements from former Bank of England (BoE) officials David Blanchflower and Andrew Sentance, both of whom have given a negative summary on the UK economy at present.

In the latter case, Mr Sentance said:

‘The UK economy continues to suffer from very weak productivity growth.

‘In both the US and the eurozone, GDP is rising 1%-1.5% faster than employment. Yet in the UK, GDP and employment are both increasing at the same rate – which suggests that productivity is flat and not increasing at all.

‘If Brexit causes high value-added jobs in manufacturing and financial services to move out of the UK, productivity growth could weaken further.

‘The UK economy now seems to be in a prolonged phase of disappointing growth performance, and it may well be that the current policy of keeping interest rates at exceptionally low levels is aggravating this problem, not making it better.’

Italian Bond Sale Sparks Euro to Pound (EUR/GBP) Exchange Rate Rise

The main support behind today’s Euro to Pound (EUR/GBP) exchange rate rise has been Italy, despite political news from the nation weakening the single currency on Tuesday.

Today, levels of optimism among Euro traders have risen because of hopes that the situation will ultimately be resolved without much disruption to the rest of the EU or the Eurozone.

This shift in sentiment has mainly been caused by news that the Italian government has raised around €5.6bn by selling debt.

Demand for bonds was ensured by increasing the return rate to approximately 3%, the highest level since 2014.

Traders saw this as a sign that for all its political turmoil, the Italian economy is still in shape. Offering a reassuring summary, Principal Global Investors Seema Shah said:

‘Demand at today’s auction was very encouraging, and clearly indicates that investors still have faith in the Italian economy, if not the government.

‘Italy is unlikely to face major refinancing problems in the near term.’

Similarly, Hao Ran Wee of Barclays said:

‘No investor would lend to the Italian government if they deem it as being unable to pay back its debt.’

The Euro has also been aided by economic news from the wider Eurozone today – German unemployment has fallen to a historic low and inflation has risen sharply.

With a shift from 5.3% to 5.2% in May, the German unemployment rate has fallen to the lowest level in 28 years since reunification.

The inflation stats weren’t quite so historically positive, but have still greatly raised hopes for higher inflation to be reported across the Eurozone on Thursday.

If inflation moves close to (or exceeds) the European Central Bank (ECB) target of 2%, this increases the chances of ECB officials acting and raise interest rates from their current 0%.

GBP/EUR Exchange Rate Forecast: Will UK Consumer Confidence Stats Trigger Pound Sterling Recovery?

There is a chance for the Pound (GBP) to rise against the Euro (EUR) before the end of the week, although given the positive forecasts for Eurozone ecostats this is a slim possibility.

The UK’s main data release will come early on, when GfK announces any changes to consumer confidence levels in May.

A small improvement is expected for the reading, but any Pound-boosting effect could be overshadowed by more good news out of the Eurozone.

The Eurozone unemployment rate in April is expected to be reported lower on Thursday, from 8.5% to 8.4%. Additionally, higher inflation is predicted across the single currency bloc.

As mentioned above, higher inflation increases the chances of an ECB interest rate hike, although levels of price growth are still tipped to remain below 2%.

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TAGS: Pound Euro Forecasts