The GBP to EUR exchange rate spent the whole week hovering around the 1.15 level despite some higher-level economic data from the Eurozone. The week was topped off with GDP estimates for the first quarter and this saw the numbers coming in as expected with the continent showing a Q1 loss in contrast to the UK’s growth.
The GBP to EUR will see some talk of inflation in the weeks ahead, alongside the tapering argument for the Bank of England.
Europe starts to reopen but will play catch up on UK
The week started with high level data for the German economy but some of this was in sentiment and that is being subdued by the ongoing lockdowns in the country. Business climate index readings were slightly lower, and the consumer confidence number was also lower.
Germany followed that up with a surprise increase in the country’s unemployment, with a 9k increase in jobless claims, compared to expectations for a -10k drop. The unemployment rate in the country stayed stuck at 6% as businesses struggle to hire in the confusion of when things will reopen. Europe is playing catch up to the UK, which went through the same problems, but is now powering ahead.
Inflation followed a day later, and Germany saw its first rise above 2% in two years, but nobody is talking “stagflation” yet. Traders forget that the European economy wasn’t growing before the pandemic and stimulus was simply propping things up. To destroy the underlying tourism and other sectors may not see the bounce that many expect.
The overall European inflation number was in line with expectations at 0.8% but these numbers will rise when lockdowns lift. GDP for Germany was -3% for Q1, which was slightly better than the 3.2% forecast. Italy saw a -1.4% loss and Europe saw -0.6%. These are in contrast to the UK’s 0.3% growth for the quarter, with a reopening at the end of it. The situation is starting to lift in Europe, with the likes of France loosening restrictions, but the chance of catching the UK on growth is slim and traders are maybe overvaluing the euro here.
UK gets a big growth boost
The UK economy got another growth boost when it appeared that EY ITEM Club, which is an economic analyst group, said that UK GDP will grow by 6.8% in 2021. This would be the fastest growth rate since 1941 and would go a long way to repair the slump of 2020.
The group’s previous expectation was 5%, which was in line with the BoE and the IMF, but it has revised the figure based on the vaccination program and reopening.
The club said that continued support from the government and Bank of England policy could see 4-5% growth in the second quarter alone. The expectation is for the UK economy to go back to the pre-pandemic level in the second quarter of 2022, which is three months ahead of schedule.
Investment bank Goldman Sachs had an even higher forecast at around 7% and it can’t be long until traders price in this reality.