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Pound Euro Exchange Rate to Sink on Further Economic Downturn for UK?

Pound Coin on Euro Banknote GBP/EUR

GBP/EUR Exchange Rate Sours on Hawkish ECB

The Pound Euro (GBP/EUR) exchange rate is softening this morning as a quiet trading calendar left Sterling exposed to domestic pressures. On the other hand, a hawkish European Central Bank (ECB) is strengthening the Euro as expectations of sustained rate hikes increase.

At time of writing the GBP/EUR exchange rate is around €1.1386, a 0.27% fall from this morning.

Euro (EUR) Buoyed by Aggressive Monetary Policy

The Euro (EUR) is enjoying success against most of its peers this morning as expectations of prolonged aggressive rate hikes are buoying investors. Over the weekend, ECB Governing Council member appeared hawkish as he saw the central bank continuing its aggressive monetary policy. Rehn expects the ECB to enact ‘significant interest rate increases from the ECB this winter and the coming spring.’

Meanwhile, a poll from Reuters showed that the ECB is likely to raise interest rates by 50bps at the next meeting. With speeches from ECB members today, any further hints towards the central bank’s movements going forward could bolster the Euro.

Looking beyond today, the trading calendar remains fairly quiet this week ahead of the interest rate decision. Flash estimates for Eurozone manufacturing and services sectors could see the single currency climb higher on improving figures. Services PMI are expected to climb back up to expansion territory for the first time in six months, highlighting a recovering sector.

Pound (GBP) Undermined by Heightened Recession Fears

Meanwhile, the Pound is languishing once again on downbeat economic assessments. Amidst the global slowdown, and against the backdrop of recovery in the European and US markets, the Pound is under pressure again. A lack of economic data has left Sterling exposed to the vulnerable state of the UK economy.

Analysts at business consultancy firm EY have warned that the economic downturn facing the UK could be far worse than expected. Against an expected 0.3% drop in GDP for 2023, EY now expects the UK to shrink by 0.7%. A myriad of downward pressures, spearheaded by reduced government support and higher taxes, have seen economic forecasts worsen as the UK continues to battle the cost-of-living crisis.

Looking ahead, and the quiet trading calendar could see the Pound succumb to mounting economic fears. Manufacturing and services PMI are set to print tomorrow, with the former only expected to climb modestly, remaining in contraction territory. Services, however, are expected to remain stable. The PMI is set to remain under 50, which would mark the fifth consecutive month of stagnation or contraction.

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