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Sharp Weakening in German Economic Confidence Drives Euro Lower vs Pound

Euro Currency Forecast

Euro Pound (GBP/EUR) Exchange Rate Slides After German Economic Sentiment Miss

A significant decline in the German ZEW economic sentiment index dented the Euro to Pound Sterling (EUR/GBP) exchange rate on Tuesday morning.

While forecasts had pointed towards a minor decline the slump from -28 to -44.1 left investors with little cause for confidence.

With sentiment sliding further into negative territory the outlook for the German economy appears muted at best, fuelling bets of a potential incoming recession.

This latest sign of economic weakness saw the Euro (EUR) stumble, with a lack of German growth boding ill for the health of the wider Eurozone.

As global trade tensions look set to constrain growth momentum for the foreseeable future, given escalating US protectionism, EUR exchange rates may remain on the back foot for longer.

A similar deterioration in the corresponding Eurozone sentiment index added to the bearish mood of the single currency.

Higher UK Unemployment Fails to Drive Pound Sterling Back Towards its Earlier Lows

Pound Sterling (GBP) remained under pressure, meanwhile, as June’s UK unemployment rate saw a surprise increase.

Unemployment in the three months to June unexpectedly picked up from 3.8% to 3.9%, suggesting a lack of slack within the labour market.

Even so, the negative impact of this uptick was ultimately limited thanks to a corresponding increase in average weekly earnings.

As earnings excluding bonuses rose 3.9% on the year, hitting an eleven-year high, this encouraged hopes that household spending could see a similar improvement in the near future.

With stronger levels of wage growth helping to offset the impact of rising inflation this could reduce the case for a Bank of England (BoE) interest rate cut.

However, as Tej Parikh, Chief Economist at the Institute of Directors, noted:

‘While competition has pushed up salaries, thin margins and low productivity may set a ceiling for pay growth. Although vacancies remain high by historic standards, the number has been dropping since the start of the year.

‘Impressive jobs market data should not lull policymakers into a false sense of confidence.’

German GDP Contraction Forecast to Push EUR/GBP Exchange Rate Lower

The EUR/GBP exchange rate could lose further ground on Wednesday with the release of the second quarter German gross domestic product report.

Forecasts point towards growth contracting -0.1% on the quarter, reflecting the slowdown seen in other recent data.

A negative reading here would naturally increase the odds of a potential recession, as long as the German economy appears to remain on track to weaken further in the third quarter.

Although a minor contraction here may not be enough to drag the overall Eurozone growth rate into negative territory this could still weigh heavily on the Euro.

On the other hand, if the German economy delivers a positive growth reading this would offer the EUR/GBP exchange rate a solid rallying point.