Pound to Euro Lower as UK Enters Deepest Recession on Record

Pound Sterling Forecast: Sterling’s Rise Against the US Dollar and Euro Continues

The pound has been lower in the last 24 hours as the currency markets digest some not wholly unexpected news that the UK entered its deepest recession on record in May to June, coming in at -20.4%. The news released saw the pound to euro rate gently slide from over 1.11, and 1.31 on GBPUSD, to 1.30 and 1.10 respectively.

The fall for the pound is perhaps not as severe as it might possibly be, given that the news was not unexpected, but the harsh reality of the figures is still not good news. There was some optimism from the numbers however, in that for May and June, the rebound was very strong with June economic growth for the UK a larger than expected 8.7%, which is pointing more strongly to signs of a V-shaped recovery.

What will become more and more important in the coming weeks is how the Coronavirus pandemic plays out, as it will likely determine government policy and help to shape the direction on the pound. We are currently seeing lockdowns of varying degrees in Greater Manchester, Luton, Aberdeen and also Leicester, all of which will have an economic impact.

The Office of National Statistics (ONS) who compiled the Gross Domestic Product (GDP) data, confirmed it was the lockdown which contributed to the record fall, as consumers and business could not be economically active. The UK also experienced a longer lockdown than some other countries, which might have meant it is worse off because of it.

For example, the data for the recession shows the UK as the worst performer amongst the G7 nations, and puts it second only to Spain in Europe. Whilst US GDP shrank 32.9% in Q2, the figures for Q1 were slightly better and the Eurozone is predicted Q2 numbers of -12.1% to be released tomorrow.

Will the Pound to Euro and Pound to US Dollar Rate Rise or Fall Ahead Against?

There is limited data today or tomorrow for the pound but later today we do have the latest jobs data from the United States, which will be interesting since the US dollar has been a little strong lately as investors get some better visibility of the US rebound.

1.8 million new jobs were created in the US economy according to the Non-Farm Payroll (NFPR) report last week, which coupled with some stronger inflation data, has all pointed towards a more healthy US economy bouncing back.

There are still some challenges ahead for the US currency, we have the US Presidential elections in November and already this can be seen as a factor driving the value of the US dollar, typically a currency can weaken in the run up to an important event like an election.

The lack of confidence in how the US has been handling the Coronavirus is also a topic in the markets to be conscious of, although now we are seeing evidence that US cases have plateaued, a further reason for optimism on the US dollar lately.

GBPUSD levels are as mentioned over 1.30 on the interbank rate, which is quite a shift from the 1.20 lows seen in the last 3 months. This weakness being displayed by the US dollar is one of the main reasons for the move, as we have explained the pound has been relatively unloved lately.

For the pound against the euro, we can look to movements on the US dollar as some indicators to behaviour since often big moves on EURUSD exchange rates as we have seen, can have a real influence on GBPEUR and GBPUSD levels.

The fact the pound has been a little lower against the euro over the last 3 months, whilst it is higher against the US dollar, is explained by the movements on EURUSD rates as it shifts in recognition of the fact Europe has made some good headway to tackle the virus and its economic effects, whilst for the US there are still some question marks.

The currency markets are presenting financial markets with many issues to debate that can influence your sterling exchange rate. For a more comprehensive breakdown of what lies ahead and what we might expect please do get in touch.

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