After a bearish week the Pound Sterling to Euro (GBP/EUR) exchange rate has been making gains on Friday morning as Eurozone GDP figures proved discouraging.
Surprise Riksbank Interest Rate Cut Shored up Euro to Pound Sterling (EUR/GBP) Exchange Rate
The appeal of Pound Sterling (GBP) was substantially dented this week after the December Industrial Production report and latest NIESR GDP estimate fell short of expectations, suggesting that the economic health of the UK was not as robust as investors had hoped. Industrial output unexpectedly contracted on the year, slipping from 0.7% to -0.4% as demand weakened amidst global market turmoil. With economists having already dialled back their predictions for when the Bank of England (BoE) will move to tighten monetary policy, with some estimating that the first interest rate hike may not come until 2020, this bearish data prompted a fresh slump for the Pound.
Although domestic economic data was lacking on Thursday the Euro (EUR) received a strong boost as the Riksbank surprised markets by cutting interest rates deeper into negative territory, lowering the baseline from -0.35% to -0.50%. A sharp decline in the strength of the Swedish Krona (SEK) pushed investors back towards the single currency, with increased safe-haven demand also fuelling higher demand. While the Riksbank’s decision appears to have been a pre-emptive counter to fresh European Central Bank (ECB) monetary loosening which is anticipated in March the increasing odds of an imminent ECB move failed to particularly weigh on the single currency.
Euro (EUR) Slumps as Italian GPD Falls Short of Forecast Today
While stock markets have been making some attempt to rally on Friday, confidence in the Eurozone has faltered further, with the latest German and Italian GDP figures failing to offer any particular encouragement to traders. Germany’s fourth quarter GDP held steady at a modest 0.3% on the quarter, with the Italian economy only growing 0.1% in the same period. These weaker figures do not seem to bode well for growth within the wider currency union, particularly as Finland remains in recession. As tensions also continue to flare within Greece, as protesting farmers clash with police, the outlook of the Eurozone does not appear overly positive.
UK Construction Output was found to have risen on the year in December, climbing from -0.9% to post growth of 0.5%. This did fall slightly short of the forecast expansion of 0.7%, although traders nevertheless took heart from the stronger showing. As a result the Pound Sterling to Euro (GBP/EUR) exchange rate has been making bullish gains so far this morning.
GBP/EUR Exchange Rate Forecast: Draghi Comments Predicted to Drive Euro Down
On Monday ECB President Mario Draghi will be speaking in Brussels, with the single currency likely to soften in response to any reiteration of the central bank’s willingness to act. Should Draghi continue to imply that fresh easing is to come in March the GBP/EUR exchange rate could make some strong gains, with increasing policy divergence between the ECB and the Fed set to reduce the appeal of the Euro.
The latest Rightmove House Prices result may help to push the Pound higher against rivals, if the domestic housing market is shown to have remained robust in February. Although there have been concerns over the development of a bubble within the market pundits are more likely to be reassured by any signals of strength within the UK economy.
Current GBP, EUR Exchange Rates
At the time of writing, the Pound Sterling to Euro (GBP/EUR) exchange rate was on an uptrend at 1.2880, while the Euro to Pound Sterling (EUR/GBP) pairing was slumped around 0.7764.
