Pound to Euro Rate Falls Due to Worsening Economic Activity

GBPEUR: Chances of No-Deal Force GBP to Surrender Gains

The pound to euro exchange rate has fallen to 1.11 for the pair having seen better gains the week prior.

The UK officially entered recession this week after UK Gross Domestic Product fell 20.4% in the second quarter marking the first technical recession since 2009.

Despite the announcement which was largely priced in to the market, investor sentiment has proven buoyant which was demonstrated in the FTSE index which rallied to a 3 week high on Wednesday. Nonetheless the pound came under pressure falling over 0.5% that day. Economic activity is currently still only one sixth of what it was in February of this year.

There is hope that there will be a rapid rebound in economic activity from here on with a V shaped recovery although there are concerns that the level of unemployment could prove a major hindrance to that recovery. UK employment has fallen at the fastest rate in ten years as recent data showed 220,000 Brits lost their jobs in the second quarter of 2020. The last time negative data like this was seen was at the time of the 2008 financial crisis when unemployment rose rapidly in 2009.

Those with a pound to euro exchange requirement should pay close attention to all the latest economic indicators to determine how well the British economy is recovering and also how quickly the unemployment level rises as the furlough scheme comes to an end. How swift companies are to restructure and make redundancies will likely carry significant weight for the economic recovery.

EU Gross Domestic Product numbers are released today and should give an indication as to how quickly the EU economy is bouncing back from COVID-19. Much of the EU went into lockdown sooner than the UK did so there is an expectation and debate that the EU may bounce back quicker than the UK. The UK is also very heavily weighed with the services sector including restaurants with much of it unable to work from home. Today’s important data will be keenly monitored as a good barometer of that bounce back in the EU.

Next week has important UK data too with UK retail sales released on Friday and particularly important will be the UK Purchasing Managers Index data for the services sector. The commentary in the weeks and months will almost certainly revolve around the V Shaped Recovery.

US retail sales are released later today which should give some clues as to the health of the US economic recovery at a time when COVID-19 cases continue to soar.

Pound to Euro Forecast as Brexit Continues

The Brexit negotiations continue to remain one of the most important drivers for sterling exchange rates as the clock counts down until the end of the year when Britain ends the transition period. In a positive sign to the state of current affairs the Cabinet minister Michael Gove recently said “I’m confident there will be a deal. I think there has been a welcome change in tone over the last few weeks”

Meanwhile trade negotiations continue between the UK and Japan to try and reach a trade agreement before Britain leaves the EU bloc. Expectation is that a deal will be reached by the end of the month to avoid disruption when the UK completes its transition period at the end of 2020. The Financial Times reports that the UK trade department estimates that there could be a 21% rise in UK exports to Japan although it also reports that UK imports from Japan will rise by a greater amount of 79%. Any sign a of a trade deal being reached with good trade ties could prove extremely beneficial for the pound. It’s just a question of if and when a deal is reached.

The GBP forecast is likely to see additional volatility depending on the speed of the recovery of the global economy. In a sign that the global economy is showing green shoots the Chinese economy has seen a jump higher in exports which rose sharply in July. The higher demand indicates that other economies across the globe are also starting to come out of the worst of the crisis despite global trade at considerably lesser levels than before the onset of coronavirus. Louis Kujis, head of Asia economics at Oxford economics said “the good data for July is in part a reflection of that recovery of the global economy and global demand.”

It is worth pointing out that the pound crashed in March as Britain was about to enter lockdown as funds were pulled out of the UK stock markets resulting in the sharp decline. As markets settled and governments introduced measures to keep their respective economies afloat and on a magnitude never seen before, the pound soon recovered quickly. These next few months will be crucial in determining the future outlook for the British economy.