Declining German Business Sentiment Shores up Pound Euro (GBP/EUR) Exchange Rate
As the German IFO business climate index missed expectations the Pound Sterling to Euro (GBP/EUR) exchange rate found fresh traction.
The headline index dipped from a downwardly revised 93.2 to 92.7 in October, indicating that sentiment among German businesses had started to worsen once again.
Fading confidence within the Eurozone’s powerhouse economy could pave the way towards a renewed slowdown in economic activity, a prospect which pushed the Euro (EUR) lower.
As Carsten Brzeski, economist at ING, noted:
‘As all of Europe is in the second wave of the virus, today’s IFO index definitely marks the end of the rebound and the start of double-dip fears.’
With the Eurozone economy appearing at increasing risk of returning to a state of slowdown in the final quarter of the year support for the single currency naturally diminished.
Signs of UK Retail Softness Set to Weigh on GBP/EUR Exchange Rate
Ongoing trade talks between the UK and EU helped to support demand for Pound Sterling (GBP), meanwhile.
Lingering optimism over the possibility of the two sides reaching an agreement in the days ahead offered a boost to GBP exchange rates at the start of the week.
However, the mood towards the Pound could easily sour on Tuesday with the release of the CBI distributive trades index.
With forecasts pointing towards a decline in the headline index this looks set to point towards a deterioration in confidence within the retail sector.
As stronger levels of consumer spending and retail activity have previously helped to shore up the UK economy in the face of negative headwinds any weakness here would bode badly for the wider outlook.
Unless the survey can highlight a greater sense of resilience within the retail sector the GBP/EUR exchange rate looks set to return to a weaker footing in the near term.
Euro Weakness Forecast as ECB Braces for December Action
On the other hand, the Euro may struggle to find renewed demand ahead of the European Central Bank’s (ECB) latest policy meeting.
Although markets do not expect to see the central bank opt to enact fresh monetary loosening measures at this stage the meeting could still put pressure on EUR exchange rates.
If policymakers leave the door open for action to come in December this could see the single currency fall sharply out of favour.
Any fresh indication that the ECB is uneasy with the relative strength of the Euro may also fuel an uptrend for the GBP/EUR exchange rate on Thursday.
Without any hawkish signals from the ECB the Euro looks set to remain largely biased to the downside in the near future, even with growing political jitters in the US weighing on the US Dollar (USD).