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GBP/EUR Exchange Rate Strengthened after BoE ‘Brexit’ Caution

  • Disappointing Eurozone industrial production dented Euro
  • GBP/EUR bullish after BoE left interest rates unchanged
  • Weak UK construction data predicted to end Pound rally
  • EUR volatility follows disappointing Eurozone GDP report

Pound (GBP) Trended Higher despite Contracting UK Construction Output

The Euro (EUR) softened after the Eurozone’s first quarter GDP was unexpectedly revised lower, in spite of a stronger German figure. While UK Construction Output posted a particularly sharp contraction of -4.5% in March the Pound Sterling to Euro (GBP/EUR) exchange rate nevertheless climbed higher on Friday, trending in the region of 1.2721.


Weak UK Production Figures Weighed on Pound Sterling Outlook

UK data proved particularly poor earlier in the week, with the latest Industrial and Manufacturing Production figures prompting a sharp downturn in the value of Pound Sterling (GBP). With the domestic industrial sector back in a state of recession for a third time since 2008 confidence in the wider economy was naturally dented. This more pessimistic attitude was reinforced by the NIESR Gross Domestic Product Estimate for April, which indicated that the UK’s economic growth had continued to slow since the start of the year.

The appeal of the Euro (EUR) had been bolstered by the news of a potential breakthrough with regards to the long-delayed signing off of the current Greek bailout review. As German opposition to debt relief softened hopes were raised that the Hellenic nation might not be dragged into another crisis this summer, when large debt repayments are due to creditors. As support for Greek banks is rumoured to be a strong possibility in the near future optimism helped to drive the single currency higher against rivals.

BoE Commentary Prompted Strong GBP/EUR Exchange Rate Rally

This Euro strength dissipated on Thursday in response to the March Eurozone Industrial Production figures, however, which showed an unexpected drop in output on the year. With French inflation confirmed to have dipped further into negative territory speculation returned to the possibility of the European Central Bank (ECB) enacted additional monetary loosening measures in the near future. As a result the common currency softened, lacking further support as markets adopted more of a risk-on position.

Pound Sterling, on the other hand, saw a marked rally in response to the latest communications from the Bank of England (BoE). Investors were encouraged by the fact that the decision to leave interest rates unchanged was made unanimously, in spite of earlier rumblings of a potential dovish rebel, as some hopes remained for a possible rate hike before the end of the year. While the quarterly Inflation Report showed a lowering of the central bank’s growth forecast this failed to dent the buoyance of the Pound, as analysts with Lloyds Bank noted:

‘Nevertheless, with the focus on June’s upcoming EU referendum and the inherent uncertainty this brings to the economic outlook, it is apparent that the update to the MPC’s projections was at this stage a mere holding exercise.’

GBP/EUR Exchange Rate Forecast: Eurozone GDP Predicted to Boost Euro Demand

UK Construction Output is expected to indicate weakness, however, with forecasts pointing towards a sharp contraction on the year in March. With referendum uncertainty continuing to hang over the fortunes of the Pound a weaker showing is likely to put an end to this latest relief rally. ‘Brexit’-based worries are expected to remain a strong downside drag on Sterling ahead of the weekend.

The first quarter GDP results for Germany and the wider Eurozone could shore up the Euro, meanwhile, if economic growth is found to have been more robust at the start of the year. Stronger growth could discourage the chances of imminent ECB intervention, although disappointing figures may still boost the GBP/EUR exchange rate.