The EURGBP exchange rate saw a rally on the week but that was unwound with the dovish ECB statements at their most recent interest rate and policy meeting. The pound is being supported by a fifth-straight day of lower virus cases and current trends could see sterling test the yearly lows.
The EUR to GBP now trades at 0.8555 with the lows in April coming in below 0.8500.
Attention will soon turn to German elections
Germany’s elections in September will not only mark the end of the Merkel era but could also see a structural change in Germany’s fiscal policy.
The German economy has seen its dominant position wane in recent years but thanks to significant fiscal stimulus since the start of the pandemic, the country will be one of the first eurozone countries to have returned to its pre-crisis levels. This was helped by the country’s manufacturing economy which was not affected in the same way by lockdowns as the services sector.
ING bank said: “Looking at some structural indicators, the German economy has, at best, stood still over the last few years, if not lost further ground. Rankings on international competitiveness have seen the German economy dropping further between 2017 and 2019. The quality of traditional infrastructure has weakened. Investment growth had been much weaker than in the rest of the eurozone until the start of the crisis.”
The differences between the four parties vying for the next government is largely based on taxes. While the CDU/CSU and FDP advocate no tax increases but different forms of tax relief, the Greens and the SPD have proposed tax increases for the highest income bracket as well as the introduction of a wealth tax. This could have a big bearing on the competitiveness of Germany in the coming years and that will also affect the euro versus the pound if investment flows to Germany wane.
German data dominates the week ahead
Data for the German economy will dominate the week ahead with IFO Business Climate figures released on Monday. Analysts are expecting a higher number but rising virus case numbers could mean business confidence is a lagging indicator.
Thursday will be more important with German employment numbers and inflation for the month. The end of the VAT measures implemented during the pandemic are expected to see inflation rocket to 3.2% for the German economy after only 1.1% last month. Unemployment is expected to drop again this month despite the risk of increased restrictions.
Friday is also a big day for European data with Germany’s flash reading for Q2 GDP growth expected to show a 9.6% improvement. Italy will also see the same GDP figures released, while we will also see the release of core inflation for the Eurozone.
The EURGBP exchange rate trades just above 0.8550 and the data should determine if the pair is on course to test the April lows for the year.