The GBP EUR exchange rate rallied from a sharp drop in the previous week as traders absorbed the recent Bank of England rate hike and forecasts. There are few positives in economic data for both the UK and Eurozone, which has led to a consolidation pattern in the pound sterling versus the euro. Thursday’s GDP update for the UK saw weakness in the economy but maybe not as bad as feared and sterling moved higher into the weekend.
The GBP v EUR was trading near the 1.1742 level after last week’s crash to 1.1600.
UK economy suffers as consumers cut back spending
The UK economy contracted in March as the cost-of-living crisis hits consumers.
Data released by the Office for National Statistics on Thursday showed that GDP fell by 0.1% for the month, which was worse than the 0% growth forecast. The UK’s dominant services sector shrank by 0.2% in March, which was the key driver of the drop.
The figures highlight an economy that may dip into recession, but the figures could have been worse with the backdrop of war and supply chain problems. The reality is also that Europe faces the same issue with Irish inflation around the 7% mark and Germany the same.
Darren Morgan, director of economic statistics at the Office for National Statistics said: “The UK economy grew for the fourth consecutive quarter and is now clearly above pre-pandemic levels, although growth in the latest three months was the lowest for a year.”
“This was driven by growth in a number of service sectors as the economy continued to recover from Covid-19 effects, including hospitality, transport, employment agencies and travel agencies. There was also strong growth in IT,” he added.
Chancellor Rishi Sunak said: “The UK economy recovered quickly from the worst of the pandemic and our growth in the first few months of the year was strong, faster than the US, Germany and Italy, but I know these are still anxious times.”
UK stokes the fire of Northern Ireland protocol once more
The UK reacted to the latest Northern Ireland elections with Boris Johnson reiterating that the government may drop elements of the Northern Ireland protocol.
The attorney general has said that the Prime Minister can rip up the protocol and Johnson is expected to brief ministers on his plans. That is not going down well with the EU and Ireland’s Simon Coveney said:
“Clearly, what the British government has said is that they intend to move ahead with domestic legislation of their own if they don’t see the compromises they are demanding. That is deeply unhelpful and has gone down very badly across the European Union.”
“It has ratcheted up tension between the UK and the EU at a time when we don’t need it,” he added.
The European Union had previously said that they would consider scrapping the Brexit deal in its entirety if the UK acted on the protocol. That is adding another level of political tension at a time of stress and the pound sterling is weighed down by the potential for action and reaction.