GBP Steady After UK Economy Stalls In January

The Pound to Euro exchange rate traded near recent highs on Friday after UK GDP unexpectedly stalled in January, while ongoing volatility in global energy markets continued to shape currency sentiment.

DAILY RECAP:

The Euro (EUR) remained under pressure as markets continued to focus on rising energy prices and renewed safe-haven demand for the US Dollar.

Oil prices pushed higher again as tensions in the Middle East escalated, with Iran reportedly intensifying attempts to disrupt shipping and infrastructure in the region. The latest developments lifted crude prices back toward the $100 per barrel mark and heightened fears of a fresh energy shock.

Such concerns weighed on the Euro, with the single currency also undermined by its inverse relationship with the US Dollar as investors sought safety in the ‘Greenback’.

However, the Euro’s downside remained somewhat limited as speculation grows that the inflation risks created by surging energy prices could force the European Central Bank (ECB) to adopt a more hawkish policy stance in the months ahead.

Meanwhile, the Pound (GBP) struggled to gain traction following the release of the UK’s latest GDP figures.

Data showed the UK economy unexpectedly failed to grow in January, with output coming in flat on a month-on-month basis after expanding by 0.1% in December. The result missed forecasts for a 0.2% expansion and reinforced concerns that the UK economy remains stuck in a low-growth environment.

Pantheon Macroeconomics noted that GDP was unchanged month-to-month in January, undershooting expectations and highlighting the fragile nature of the UK’s economic recovery even before the recent geopolitical tensions intensified.

Despite the disappointing growth reading, Sterling avoided sharp losses as investors continue to scale back expectations for Bank of England (BoE) interest rate cuts amid the inflation risks posed by surging global energy prices.

Near-Term GBP/EUR Forecast: Energy Markets to Remain Key Driver

Looking ahead, developments in global energy markets are likely to remain a key driver for the Pound to Euro exchange rate.

Further escalation in the Middle East could push oil prices higher and amplify stagflation fears for both the UK and Eurozone economies.

At the same time, markets will continue to assess how higher energy costs could influence central bank policy on both sides of the Channel.

If investors become increasingly convinced that the Bank of England will maintain tighter policy for longer than the European Central Bank, the Pound may retain some support against the Euro despite the latest disappointing UK growth figures.