GBP EUR Higher as German Inflation Hits 5%

The GBP EUR exchange rate was -0.10% lower on Tuesday after much stronger German economic sentiment data. The market was expecting another dip in the index to 20, but it came in above 30. The eurozone number was also higher at 25.9 versus an expected 25.9. Today will bring the release of German inflation data and that could move the GBP v EUR.

The GBP to EUR was trading at 1.6980 after a bounce from last week’s selling to 1.1700.

German ZEW confidence smashes expectations

The German ZEW Economic Sentiment Index unexpectedly beat market expectations as it unexpectedly improved to 31.7 from 22.3 previous, while beating estimates of 19.0.

Meanwhile, the Current Conditions sub-index dropped to 12.5 in November as against 21.6 recorded in the previous month and 18.0 expectations.

The Eurozone ZEW Economic Sentiment number was also higher at 25.9 for the current month compared to 21.0 previous.

The German number has helped to boost the euro with the first rise in the index in six months after it dropped from a high of 84.4 in May.

However, the ZEW President Adam Wambach still stated that supply chain bottlenecks for raw materials and parts could have a negative effect in the current quarter.

Today will see the important German inflation data with an expectation of 4.5% inflation. A higher result could lift the euro as traders would add to bond market bets for a eurozone rate hike.

UK facing slower growth and economic disparity say NIESR

The cost of living squeeze in the UK will hurt growth, says NIESR Interim Deputy Director for Macroeconomics, Paul Mortimer-Lee:

“A squeeze on real incomes for workers and those on Universal Credit will slow economic growth next year, with the adverse effects on consumption offset by lower savings.

Meanwhile, inflation is set to peak around 5%, forcing a reluctant Bank of England to raise interest rates, albeit grudgingly. Unemployment should settle in a narrow range around 4 1/4%. The risks are skewed to the upside on inflation and the downside on growth,” he said.

In the Bank of England’s economic forecasts last week they said that incomes after inflation and tax would fall in 2022 and 2023.

NIESR’s deputy director for Public Policy, professor Adrian Pabst, added:

 

“Britain’s broken economic model shows no signs of turning into a high-wage, high-productivity, high-growth economy anytime soon. England’s regions and the three devolved nations are not catching up with London and the metropolitan South-East.

Instead, regional disparities are widening while the poorest households risk sliding into destitution. The task for policymakers is to raise regional productivity outside of metropolitan areas, connect London’s capital markets with regional and local capital markets, and devolve both power and resources to local government combined with greater accountability.”

The economy faces tough times, but this is not solely a UK problem as the Eurozone will also find itself in the stagflation conundrum. Raising interest rates to curb inflation in economies that have been wrecked by government lockdowns is becoming a global problem.

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