- Pound Euro exchange rate rallies on UK GDP revisions – Euro limited by mixed Eurozone printings
- UK’s economic future uncertain on domestic data – Fears voiced over possible recession
- Eurozone remains in the grips of low growth and low inflation – ECB’s September decisions remain uncertain
- UK PMIs due in near-term – ECB policy decisions due early September
The Pound has been giving a mixed performance over the week, having initially risen to a high of 1.17 against the Euro before losing ground and closing trading in the area of 1.16.
The Euro has been in a less certain state, with Germany offering a sporadic mix of positive and negative results.
In the long run, any signs of UK economic deterioration after the EU Referendum will lower confidence in the Pound, while the Euro’s future movements are set to be dictated by the odds of European Central Bank (ECB) action in September.
Pound Gained on GDP Stats on Friday, Euro Softened despite Positive German Result
Pound Euro exchange rate movement on Friday was sporadic, with an initial rise proving only temporary and the UK currency soon giving in to pressures from gross profit-taking over the course of the week.
The last big boost to Sterling’s value came on Friday morning, when the UK’s Q2 GDP second estimates came in; in line with forecasts, these rose on both the quarter and the year.
For the Euro, Friday’s trading was more consistently poor, with EUR GBP exchange rates hovering around 0.85.
Eurozone data focused on Germany’s GfK consumer confidence result for September, which rose from 10 to 10.2, as well as Spanish retail sales in July, which fell on both the month and the year.
Economist’s Response to Positive UK Data – Could UK Recession be in Store?
With the Pound managing to sustain a rally over August 22nd to the 24th on seemingly positive or smaller-than-expected declines in UK domestic data, a number of economists gave their views on the bigger picture, especially when focusing on seemingly rising retail sales in August and an increase in quarterly UK business investment during the same month.
Commenting on the situation, Pantheon Macroeconomics Chief UK Economist Samuel Tombs said;
‘Looking ahead, consumers might be able to maintain strong growth in their spending for another quarter, but when inflation picks up in earnest early next year and firms follow through on plans to freeze hiring, they will have to slow down.
Meanwhile, the slight rise in business investment in the second quarter provides little reassurance about the post-referendum outlook, since few businesses anticipated the Leave vote and surveys suggest firms are recoiling from major financial commitments in third quarter. As a result, we continue to see a high risk that the economy enters a mild recession over the coming quarters’.
It is worth stressing that hitting a recession state is not an immediate death knell for a nation’s economy, but should a prolonged recession take place, confidence in the Pound and the UK as a whole is expected to plummet.
Potential ECB Policy Moves in Focus after German Results Prove Inconsistent
The latest batch of German economic data has proven troubling to investors, who have found themselves coming to the conclusion that the Eurozone’s most powerful economic contributor may be facing hard times ahead.
The August PMI flashes for the composite, services and manufacturing fields all fell, while a more mixed result was seen for the Q2 finalised GDP growth rate on the quarter and year.
Forecasting on possible ECB action in the future with regard to German data, Lloyds economists said;
‘Today’s German IFO survey will be watched for signs of ongoing resilience in the economy. Such a signal would reduce the likelihood that the ECB increases policy stimulus at its next meeting on September 8th, not least because it could limit any downward revisions to the ECB’s new growth and inflation forecasts. Our central expectation is that policy rates will be left on hold, but a further time extension of the asset purchase programme could still be announced’.
As it stood, the IFO survey scores fell in August for business climate, current conditions and expectations, signifying a lack of resilience. Just to add to the unclear picture, the GfK consumer confidence forecast for September rose from 10 to 10.2 against predictions of a decline.
Early September to Bring UK PMIs and Possibility of Major ECB Policy Decisions
The next high-impact data to watch out for with regards to GBP EUR pairing movement will come from the UK, with September 1st, 2nd and 5th respectively bringing the UK’s manufacturing, construction and services PMIs for August.
The July results saw major slides into the sub-50 contraction area for all non-construction fields; construction was already in contraction in June. If the Pound is to experience any kind of support when these results come out, rises close to or above 50 will be required.
From the Eurozone, September 8th will bring the announcement of the ECB policy decisions for the month, which will include both the central bank’s interest rate but also its quantitative easing plans for the future.
Recent GBP EUR Exchange Rates
At the time of writing, the Pound Euro (GBP EUR) exchange rate was trending in the region of 1.1694 and the Euro Pound (EUR GBP) exchange rate was trending in the region of 0.8552.
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