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Pound Euro Exchange Rate to Slide on Downbeat UK Economic Outlook?

Pound coin on a Euro banknote

GBP/EUR Exchange Rate Wavers amid Mounting Recession Fears

The Pound Euro (GBP/EUR) exchange rate is seeing mixed success today as the market remains uncertain over the economic outlook of the UK.

At time of writing the GBP/EUR exchange rate is around €1.5536, relatively unchanged from this morning’s opening levels.

Pound (GBP) Fluctuates on Economic Concerns

The Pound is experiencing mixed success today as concerns over economic growth overshadow the fiscal measures outlined by Chancellor Jeremy Hunt. A swathe of tax hikes and spending cuts initially boosted investors’ spirits, but experts have become concerned with growth plans.

Fears of further falling living standards and without solid growth plans, the UK economy could continue its slide, and in turn, Sterling. With the Office for Budget Responsibility (OBR) issuing a warning that not only is the UK already in a recession, but GDP is expected to shrink by more than 1.4% in 2023.

Meanwhile, the hospitality sector remains under siege as restaurant closures are increasing by 60% in the past year. The situation has become worse than during the Covid pandemic amid a combination of soaring energy costs, staff shortages, and falling bookings. Rebecca Dacre, partner at advisory firm Mazars, has warned of the trouble looming ahead:

‘The Christmas trading period is usually a bumper period for hospitality businesses. However, restaurants will be bracing themselves for a very tough winter and many face a real battle to keep afloat.

‘There’s a certainty of further insolvencies if they don’t receive much more support from the government, but the chances of the government fully turning on the taps is low.’

Looking ahead, the Pound will be trading on market sentiment alone until the printing of manufacturing and services PMI on Wednesday. Another month of contraction is expected, which could severely weigh on Sterling.

Euro (EUR) Subdued amid Mounting Recession Fears

Meanwhile, the Euro failed to muster much demand amid a downbeat market mood, limiting any further losses for Sterling. Concerning news out of China is compounded by the exacerbating situation in Ukraine.

Reports of a near-miss shell barrage on a nuclear power plant in Ukraine has rocked investor confidence. A missile attack fell near one of Europe’s largest nuclear power plants. A barrage of shells fell close to reactors and struck a radioactive waste storage building. Rafael Grossi, Director of the International Atomic Energy Agency (IAEA) remarked it was lucky that a disastrous nuclear incident was avoided, but next time could be different.

Elsewhere, dovish remarks from European Central Bank (ECB) over the weekend further sapped demand for the Euro. ECB policymaker Klaas Knot conceded that as the pace of monetary policy tightens, the pace of rate hikes will slow.

Looking ahead, the Euro could see further movement with the release of October’s manufacturing and services PMI for the Eurozone as well as Europe’s biggest economy in Germany. An expected slowdown across the board could exacerbate recession fears if the economy continues to stutter.

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