- UK industrial sector fell into recession, Pound softened
- Worries over Eurozone inflation discouraged EUR demand
- EUR/GBP exchange rate trended lower in anticipation of BoE meeting
- German, Eurozone GDP forecast to drive Euro volatility
Stronger Eurozone GDP Failed to Bolster Euro (EUR) Exchange Rate
On Friday morning the Euro (EUR) failed to particularly rally on the back of the first quarter German GDP report, despite the figure demonstrating stronger growth than forecast at the start of the year. As GDP advanced strongly on the year from 1.3% to 1.6% the Euro to Pound Sterling (EUR/GBP) exchange rate was trending narrowly around 0.7876.
BoE Decision Prompts EUR/GBP Exchange Rate Downtrend
A fresh warning on the potential impact of a ‘Brexit’ and the downwards revision of the Bank of England’s (BoE) inflation forecast were not enough to dampen the Pound (GBP). With the Monetary Policy Committee (MPC) having voted 9-0 in favour of leaving interest rates unchanged confidence in Sterling surged, prompting the Euro to Pound Sterling (EUR/GBP) exchange rate to trend sharply lower on Thursday afternoon.
Pound Sterling (GBP) Dented by Poor UK Production Data
The outlook of the UK economy seemed decidedly bleaker in the light of the March Industrial and Manufacturing Production figures, in spite of year-on-year industrial output bettering expectations. Investors were unimpressed to find that the industrial sector had fallen back into recession, while manufacturing production showed its sharpest drop in nearly three years. These results suggested that recent market volatility and ‘Brexit’ uncertainty had dragged significantly on the domestic economy, although the ongoing steel crisis will have also had a detrimental impact on the wider sector.
With the NIESR Gross Domestic Product Estimate also pointing towards a continued slowdown in the UK’s economic growth since the beginning of the year, there was little reason for markets to favour the Pound (GBP). Thus, in spite of a lack of significant Eurozone data, the Euro to Pound Sterling (EUR/GBP) exchange rate trended higher throughout the day.
Discouraging Eurozone Inflation Outlook Weighed Down Euro Exchange Rate
Demand for the single currency (EUR) weakened somewhat on Thursday morning, however, following the latest German Wholesale Price Index report. Prices declined further on the year in April, dropping from -2.6% to -2.7% and suggesting that inflationary pressure in the Eurozone’s economic powerhouse is likely to remain weak. As the French inflation rate for April was also confirmed to have moved deeper into negative territory at -0.2% this naturally raised concerns that the European Central Bank (ECB) could be forced to take further loosening measures.
A smaller-than-expected decline in the RICS House Price Balance helped to boost the appeal of Sterling, meanwhile, raising hopes that the domestic housing market remains relatively hot. Traders are primarily concerned with the upcoming Bank of England (BoE) policy meeting and quarterly Inflation Report, however. While expectations pointed towards a downward revision in the central bank’s forecasts this did not impede a modest Pound rally.
Volatility may be more limited given the universal expectation that interest rates will be left on hold by the BoE for another month. While there has been speculation of a more dovish turn in sentiment this hasn’t made a particular impact on Sterling, as researchers at ING noted:
‘Unless the BoE has a strong reason to believe that the slowdown in activity is due to something more structural than Brexit-related uncertainties, then a rate cut at this juncture would in our view be wasteful of limited policy ammunition (in the event that the UK votes to leave the EU).’
EUR/GBP Exchange Rate Forecast: BoE Commentary & Eurozone GDP to Provoke Volatility
Despite the persistent belief that the latest BoE policy meeting will see no change in interest rates markets are still likely to react to commentary from Governor Mark Carney. Should the policymaker sound more dovish the Pound could slump sharply once again, particularly if this is accompanied by a downgrade in the BoE’s inflation forecast. However, with ‘Brexit’ volatility in full swing any signs of greater optimism could fuel a stronger Sterling rally.
Turbulence may be in store for the Euro as a result of Friday’s German and Eurozone first quarter GDP results. If signs of robust growth are present then the common currency could receive another boost, discouraging talk of further ECB policy easing in the near future at least. A softer showing, on the other hand, could prompt the EUR/GBP exchange rate to extend its losses ahead of the weekend.
Current EUR, GBP Exchange Rates
At the time of writing, the Euro to Pound Sterling (EUR/GBP) exchange rate was trending lower in the region of 0.7904, while the Pound Sterling to Euro (GBP/EUR) pairing was making modest gains around 1.2652.