GBPEUR Lower After IFO Business Report

GBPEUR Lower After IFO Business Report

The GBPEUR exchange rate was -0.17% lower on Tuesday after some economic data from the UK and Germany. The UK saw lower public sector borrowing, while the German economy saw a slightly weaker GDP and a better-than-expected IFO business climate number.

GBPEUR is trading at 1.1564 at lunchtime with sterling being nudged towards the 1.1500 support level.

German IFO at a two year high

The German IFO Business Climate Index rose to 99.2 in May versus last month’s 96.8, beating the consensus estimates of 98.2. The reading was a two-year high for the index as the monthly survey of 9,000 businesses remained upbeat.

The number helped to boost expectations for Q2 and beyond after the Q1 GDP figures came in slightly weaker than expected this morning. The IFO Expectations Index, which indicates firms’ projections for the next six months, also rose to 102.9 in May from the previous month’s 99.5 reading.

The German economy shrank 1.8% quarter on quarter and 3.1% for the year, according to the Federal Statistics Office. The numbers were only slightly worse than the forecast -1.7% and -3% and were weaker than the average eurozone reading.

German consumers saw a slight increase in disposable income as the government spent billions of euros on wage protection, but virus restrictions also made it harder to spend it.

German household spending dropped by 5.4% for the quarter, but the savings rate in the country rose to a record high above 23.2%. The economy is starting to reopen and that will see the savings put to work.

UK borrowing helped the pound

April’s public sector borrowing figures for the UK showed that the government’s fiscal position was better than previously forecast by the Office for Budget Responsibility (OBR).

The latest numbers also gave hope that tax hikes and spending cuts can be avoided in the country, if the stronger growth path continues. The £92bn worth of coronavirus government support during the current fiscal year should keep public borrowing higher in 2021/22.

Capital Economics were upbeat on the tax issue, saying:

“But we have been saying since the end of last year that rapid economic growth would quickly improve the outlook for the public finances. That means the Chancellor may be spared having to implement his proposed tax hikes/spending cuts before the 2024 general election”.

Britain’s borrowing was still at the second highest in any April since the records began in 1993, with the continued government pandemic largesse. Net borrowing was now forecast to be £31.7bn, according to the Office for National Statistics. The number is £15.6bn less than was seen in April 2020, when the country borrowed around £47bn at the start of the pandemic.

The media is back to talking up the threat of the Indian variant, which is hitting the pound sterling. Despite studies saying that the vaccine offers protection from the variant, ministers said they are not ruling out local restrictions to tackle the spread.

Health Secretary Matt Hancock said the Government “will not hesitate to take further action if necessary”.