EURGBP Looks Weak as Bounce Lacks Catalyst

EURGBP to be Impacted by Brexit and Euro Strength

The EURGBP exchange rate has bounced to 0.8775 but the single currency still looks weak after last week’s Bank of England announcement. The UK has updates on GDP on Friday and tomorrow brings German inflation figures.

EURGBP could move towards the 0.8700 level if the GDP is better than expectations.

German inflation expected to hit 1%

Germany’s inflation figures are expected to hit 1% for the first time since March 2020. The figure had fallen into deflationary territory and was stuck there for six months as the virus lockdowns coincided with a rising euro. The ECB threatened to intervene in the euro rate and last week’s Eurozone inflation figures jumped to 0.9% to remove this risk. The market will now see how Germany is faring, but markets are expecting 1% and it is hard to see any big change in that figure.

The market may wait until the Friday release of UK GDP to move the exchange rate. The 3-month average is expected to show growth of 0.5% despite the move into strict lockdowns. A stronger number would set the economy up for a second quarter recovery after lockdown restrictions are expected to be lifted in March.

The Bank of England suggested this was the case last week and the market will use this as the base case for the EUR to GBP exchange rat outlook. The sell-off last week could see sterling gain further ground on the single currency if data this week is supportive.

End to lockdowns could unleash spending spree

The BoE said last week that the UK economy could return to its pre-pandemic levels by March 2021 and also suggested that households could start spending £125 billion of lockdown savings. The restrictions have seen households gather record levels of excess savings after the country was repeatedly shut down and retailers closed. The numbers are maybe surprising as online commerce has surged during the period so there is still a lot of activity to come once things reopen.

The Bank has predicted an initial burst of £6.25 billion in savings but has predicted that recovery would be faster if the public spend more.

The euro to pound outlook is awaiting the data this week but the bigger picture is being driven by the vaccination programme. If the UK can get open in March then we can see businesses make the slow move back to full production, while consumers can release this savings glut into the economy.

A reopening March would also be the first time that the economy has operated in the post-EU climate after the Brexit agreement was signed and this would factor into growth figures throughout the year.