The GBP EUR exchange rate opened the week with a drop of -0.36% after the German IFO business sentiment data showed improvement. The country’s most watched leading indicator improved for a second month to 93.0. The European Central Bank (ECB) President also boosted the euro with further clarity on the rate hike picture.
The GBP to EUR was trading at 1.7940 and the pound sterling is at risk of losing 1.1800 again.
German IFO higher, Lagarde clarifies on interest rates
Germany’s most watched leading indicator, the Ifo index, was higher for a second month in a row at 93.0 in May, from 91.9 in April. The latest move higher was helped by an improved assessment of the current outlook for businesses. The expectations component of the survey was unchanged.
ING analysts said:
“Today’s Ifo index seems to reflect new optimism. However, it also tells a tale of two economies: one with filled order books and post-lockdown re-openings and one which will also be hit by the economic consequences of the war in Ukraine and new supply chain frictions. In fact, supply chains are still disrupted due to the Shanghai lockdown and the war in Ukraine. Some might be disrupted for good.”
IFO President Clemens Fuest said:
“The German economy has proven itself resilient in the face of inflation concerns, material bottlenecks, and the war in Ukraine. There are currently no observable signs of a recession.”
Meanwhile, ECB Chief Christine Lagarde clarified the rate hike picture in a blog post outlining that the central bank is likely to exit negative interest rates by the end of Q3 2022.
“I expect net purchases under the APP to end very early in the third quarter,” she said.
“This would allow us a rate lift-off at our meeting in July, in line with our forward guidance. Based on the current outlook, we are likely to be in a position to exit negative interest rates by the end of the third quarter.”
“This means that it is sensible to move step by step, observing the effects on the economy and the inflation outlook as rates rise,” she added.
PMI data will drive the pound sterling versus euro
UK Public sector net borrowing figures for April will be announced today with inflation driving up recent interest payments on government debt. The country was still on track to borrow less than OBR projections for the financial year.
The pound sterling versus the euro will then hinge on the closely watched PMI figures for manufacturing and services sectors in the UK and Europe. The German IFO sentiment may be a positive sign for German businesses but there are many pressures in the background.
UK manufacturing is predicted to dip from 55.8 to 55, while services is expected to decline to 57 from 58.9. Both numbers are still above the 50 line which signifies expansion in the underlying sector. Services is the most dominant sector for the UK, which explains the lockdown swings as many businesses were shuttered.
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