Weaker German Growth Limits Euro Pound (EUR/GBP) Exchange Rate Upside
A sharp slowdown in the first quarter German gross domestic product left the Euro to Pound (EUR/GBP) exchange rate on a narrow trend on Tuesday morning.
As growth in the Eurozone’s powerhouse economy halved from 0.6% to 0.3% on the quarter demand for the Euro (EUR) naturally weakened.
Even so, transitory issues including colder weather and the uncertainty that surrounded government coalition talks saw much of the blame for this slowdown.
With investors expecting to see German growth rebound in the second quarter the downside pressure on EUR exchange rates was naturally limited.
As Carsten Brzeski, Chief Economist at ING, commented:
‘Despite some minor levelling off, capacity utilisation is still close to record highs, assured production in the industry is close to all-time highs and the high stock of orders and historically low inventories all bode extremely well for industrial production in the coming months.’
Euro Pound (EUR/GBP) Exchange Rate Holds Ground on Muted UK Wage Growth
As March’s UK wage data printed in line with forecasts the Euro to Pound (EUR/GBP) exchange rate came under some limited pressure.
There was some disappointment as growth in average weekly earnings was found to have slowed in the first quarter, easing from 2.8% to 2.6%.
This suggests that domestic wage growth is not picking up as much as investors would like, giving the Bank of England (BoE) less incentive to raise interest rates before the end of the year.
Sluggish wages could weigh on economic growth if consumers continue to rein in their spending, even though pay still outpaced inflation in March.
While the UK unemployment rate held steady at a 42-year low this was not enough to encourage any fresh gains for Pound (GBP) exchange rates at this juncture.
As long as markets see reason to doubt the prospect of the BoE raising interest rates in the coming months GBP exchange rates are likely to remain biased to the downside.
Further EUR/GBP Exchange Rate Volatility in Store on ECB Comments
The Euro to Pound (EUR/GBP) exchange rate could come under renewed pressure on the back of April’s finalised German and Eurozone consumer price index data.
Investors expect to see confirmation that inflationary pressure eased on the year, something which would encourage further European Central Bank (ECB) dovishness.
Focus will also fall on the latest commentary from ECB policymakers, with particular attention centred on comments from President Mario Draghi.
If policymakers maintain a more dovish outlook on the whole this is likely to weigh heavily on EUR exchange rates, with the end of the quantitative easing programme still not appearing to be in sight.
Any signs of increased hawkishness, however, may help to boost the appeal of the Euro this week.
Friday’s Eurozone trade balance figure could also shore up the Euro to Pound (EUR/GBP) exchange rate if the surplus widens as forecast.
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