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GBP/EUR Exchange Rate Retreats on Upbeat ZEW Economic Surveys

Economic Optimism in the Bloc Rises, GBP/EUR Exchange Rate Struggles to Find Purchase

The Pound Euro (GBP/EUR) exchange rate retreated slightly on Tuesday, limited by a jump in economic optimism for the bloc.

The Eurozone’s ZEW indicator of economic sentiment climbed to 31.8 in January, beating December’s reading of 29 and marking the highest print in six months.

The ZEW indicator is essentially a survey of various financial experts throughout Europe, with the results then used to gain a medium-term forecast into German, and the Eurozone’s overall economic situation.

Of those surveyed, 58.8% of analysts expected no changes in economic activity, whilst 36.5% expected improvements and 4.7% expected conditions to worsen – overall a robust result.

The results for Germany were also impressive, with January’s reading rising by 3 points to 20.4, up from the previous period’s 17.4 and the market forecast of 19.

ZEW President and Professor Achim Wambach shared his thoughts on the results, stating:

‘Private consumption, which was the most important driver of economic growth in 2017, is likely to continue to stimulate growth in the coming six months according to the survey participants’.

IMF Downgrades UK Growth Forecasts, Pound (GBP) Exchange Rates Fall

Markets are currently assessing some rather conflicting assessments on the UK’s economic future.

On one hand, the International Monetary Fund (IMF) has recently downgraded the UK’s growth forecast in light of Brexit uncertainty.

On the other, former Treasury Minister Lord Jim O’Neil, has claimed that any damage liable to be caused by the divorce will easily be dwarfed by positive developments in the global economy.

Exploring the first; the IMF downgraded the UK’s growth forecast for this year from 1.7% to 1.6%, whilst also predicting a drop to 1.5% in 2019. IMF Chief Christine Lagarde argued that this is due to the all-familiar issue of ‘Brexit uncertainty’ essentially citing concerns that a lack of business investment (due to a lack of clarity) will hamper the UK’s economy.

She also pointed to high levels of inflation and poor wage growth.

Lagarde stated:

‘The UK is losing out as a result of higher inflation, pressure on wages and incomes and delayed investment. If you look at investment alone, with 2.1% of GDP in investment, with the global economy as it is, and the space the UK economy has in that global economy, it should be rolling at 6%’.

Lord O’Neil, however, asserted that the country could be able to cope with Brexit a lot better than he had originally anticipated, pointing to strong development potential in the North West of Britain and the overall strength of the world’s economy as supporting factors.

This was, however, not enough to bolster the GBP/EUR exchange rate, with markets still predominantly focused on the IMF’s downgrade.

GBP/EUR Exchange Rate Forecast: Volatility Ahead on ECB Rate Decision

The most pertinent event on the data calendar this week will be Thursday’s European Central Bank (ECB) monetary policy decision.

With inflation in the bloc continuing to prove limp it seems unlikely that the ECB will move hawkishly, though many are considering the possibility that the central bank will make changes to its accompanying statement, or indeed that President Mario Draghi will have hawkish remarks.

Markets are keen to receive a firmer deadline on the end of the central bank’s quantitative easing (QE) scheme, with many hoping that the ECB will clearly signal the next steps in its policy overhaul.

If the bank does reveal plans to further cut back on its QE measures sooner than expected then the GBP/EUR exchange rate could come under increased pressure.

If the bank proves dovish, however, citing issues like inflation then the Pound could resume its rally.