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Euro Pound (GBP/EUR) Exchange Rate Firms as UK Enters Technical Recession

Euro Pound (GBP/EUR) Exchange Rate Ticks Higher as UK Enters Technical Recession

The Euro Pound (GBP/EUR) exchange rate is firming today, following confirmation of a technical recession in the UK.

At the time of writing, EUR/GBP is trading at around £0.8559, an increase of just over 0.2% from the morning’s opening levels.

Pound (GBP) Pressured by Technical Recession Confirmation

The Pound (GBP) is struggling to attract support today, following the latest batch of UK GDP data. In the fourth quarter of 2023, the UK economy contracted more than expected on a quarterly basis.

As the UK’s GDP shrunk by 0.3%, this marked the second consecutive quarter of contracting activity, confirming a technical recession. Elevated interest rates, high borrowing costs and weakening consumer spending have been signalled as the key issues.

Liz McKeown, Director of Economic Statistics at the ONS, commented:

‘Our initial estimate shows the UK economy contracted in the fourth quarter of 2023. While it has now shrunk for two consecutive quarters, across 2023 as a whole the economy has been broadly flat. All the main sectors fell on the quarter, with manufacturing, construction and wholesale being the biggest drags on growth.’

Furthermore, the confirmation of a technical recession is sparking bets that the Bank of England (BoE) will need to cut interest rates. Markets now anticipate up to three 25bps rate cuts over the year, applying additional pressure to the Pound.

However, the market mood is broadly upbeat this morning. This is serving to limit the impact of the bleak assessment of the UK’s economy, as the increasingly risk-sensitive Sterling catches bids.

Euro (EUR) Directionless amid Cautious Lagarde Testimony

The Euro (EUR) is largely rangebound today, on the back of a speech from European Central Bank (ECB) President Christine Lagarde.

Lagarde delivered a testimony before the Committee on Economic and Monetary Affairs (ECON), wherein she discussed monetary policy. She focused on the ECB’s aim to bring inflation down to 2% in a sustainable manner.

Lagarde commented that:

‘We will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction, taking into account the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission.’

As inflation continues to cool in the Eurozone, investors are anticipating the prospect of interest rate cuts on the horizon. However, as her speech liked clear direction on the timing, it is leaving the Euro listless as investors await further guidance.

Euro Pound Exchange Rate Forecast: UK Retail Sales Increase to Lift Pound?

Looking ahead for the Pound, tomorrow brings the release of the latest UK retail sales data, reflecting sales in January.

On a monthly basis, economists expect sales to have increased by 1.5%, which could strengthen the Pound by showing improving consumer spending. However, it may not be enough of an improvement compared to December’s staunch losses, and could leave GBP rangebound.

For Euro, meanwhile, data releases are thin on the ground through to the end of the week. Because of this, risk appetite is likely to be the predominant driver of movement.

If trading conditions deteriorate, the safer Euro could strengthen against riskier assets. However, bullish trade could weaken it against its peers.