Bank of England (BoE) Growth Forecast Fails to Weigh on Pound Euro (GBP/EUR) Exchange Rate
The Bank of England’s (BoE) gloomy prognosis for the UK economy was not enough to prevent the Pound Sterling to Euro (GBP/EUR) exchange rate pushing higher.
Even though policymakers adopted a rather cautious tone, warning that the UK economy could shrink by -14% in 2020, Pound Sterling (GBP) was able to hold onto a generally positive footing.
While the BoE expects to see the economy contract sharply there was still an element of optimism in the message, pinned on the hopes that activity will start to rebound in the later months of the year.
As the minutes noted:
‘Given the assumed path for the relaxation of social distancing measures, the fall in GDP should be temporary and activity should pick up relatively rapidly.
‘Nonetheless, because a degree of precautionary behaviour by households and businesses is assumed to persist, the economy takes some time to recover towards its previous path.’
This helped the GBP/EUR exchange rate to stabilise in the wake of the meeting, even though the possibility of future monetary policy easing remains on the table.
Eurozone Industrial Production Slump Fuels Euro Selling Pressure
Support for the Euro (EUR) remained lacking, meanwhile, in the wake of weaker-than-expected German and French industrial production figures.
Confidence in the underlying health of the Eurozone’s two largest economies deteriorated as both experienced a significant loss of manufacturing momentum at the end of the first quarter.
March’s German industrial production saw a -9.2% decline on the month, far exceeding forecasts and dragging the Euro lower across the board once again.
With investors expecting to see a similar picture in the next month’s data, in spite of tentative moves towards an easing of global lockdown conditions, there appeared little reason to support the single currency.
Pound Braces for Weaker UK Consumer Confidence Index
The mood towards the Pound could sour ahead of the weekend, however, if May’s GfK consumer confidence index falls deeper into negative territory.
With consumer confidence already in a slump any fresh decline could weigh heavily on GBP exchange rates, given the significant impact of consumer spending on the health of the UK economy.
Even so, growing anticipation for Boris Johnson’s announcement on Sunday may help to limit the potential for Pound losses in the near term.
Markets are likely to take encouragement from any tangible signs of progress towards the UK economy reopening, in spite of lingering concerns over the national infection rate.
German Exports Contraction Forecast to Drag Euro Lower
On the other hand, EUR exchange rates may come under renewed pressure on the back of March’s German trade data.
After the poor showing seen in recent German manufacturing data markets anticipate a marked narrowing of the headline trade surplus.
With a sharp -5% decline in exports forecast investors are unlikely to find any incentive to support the Euro as the odds of a deeper economic downturn rise.
Unless the trade data can better expectations, showing a more modest deterioration, the GBP/EUR exchange rate could find additional traction.