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Pound Euro Exchange Rate to Sink on Inflation Data?

Pound coin on a Euro banknote

GBP/EUR Exchange Rate Plummets amid Weakening World Trade

The Pound Euro (GBP/EUR) exchange rate is tumbling in the wake of World Trade Organisation’s stark warning of slowing global trade growth.

At time of writing the GBP/EUR exchange rate is around €1.1538, a 0.77% fall from this morning’s opening levels.

Pound (GBP) Undermined by Persistent Domestic Headwinds

The Pound is failing to find much demand today amid a lack of major data and worsening domestic woes. Global economic slowdown and downbeat retail data further weighs on Sterling.

Compounding global recession fears, economists at Danske Bank warn that UK GDP will remain in negative growth throughout 2023. Predictions also paint a bleak outlook as a recovery isn’t expected until 2024. The statement also said:

‘Inflation pressures will remain elevated during 2023, forcing the Bank of England to deliver further hikes. We do however see the peak rate well below market pricing and we expect the first cut to be delivered during 2024.’

Furthermore, troubling retail data highlights the ever-weakening UK economy. Retail sales look have slid, and pessimism grows amid the usually prosperous holiday season. The CBI distributive trades survey’s retail sales showed a drastic fall to -19, highlighting the weakest expectations of sales for the coming months since March 2021. Retailers are also cutting jobs, and fears grow of another weakening Christmas sales.

Looking ahead, the Pound could see further fluctuations with the release of Bank of England’s (BoE) consumer credit figures. An expected climb in borrowing could highlight the worsening cost-of-living crisis on consumers.

Euro (EUR) Buoyant Despite a Cautious Lagarde

Meanwhile, the Euro remains strong against many of its stronger rivals as its negative correlation with the US Dollar is cheering EUR investors.

An earlier hawkish speech from European Central Bank (ECB) member Klaas Knot, who calls for further interest rate hikes. Concerned that the central bank is not doing enough to rein in inflation, Knot claims that the risk of doing too much far outweighs the risks of too little.

However, a speech from ECB President Christine Lagarde could derail the Euro’s ascent. Mixed signals came from Lagarde as she warned that growth in Europe is slowing rapidly. But she remained relatively hawkish in her approach to future interest rate rises. Lagarde added:

‘How much further we need to go, and how fast we need to get there, will be based on our updated outlook, the persistence of the shocks, the reaction of wages and inflation expectations, and on our assessment of the transmission of our policy stance.’

Looking forward, the Euro could see further movement with a flurry of inflation figures from across the Euro area. An expected softening of inflation could serve to quell recession fears but could also see rate hike expectations slashed.

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