– Written by
James Fuller
STORY LINK Pound-to-Euro Forecast: Strong German Data Boosts EUR Against GBP
The Pound to Euro exchange rate (GBP/EUR) failed to break above 1.1700 as a stronger-than-expected surge in German business confidence provided fresh support for the Euro.
Pound Sterling remained underpinned by calmer bond markets and lower energy prices, but evidence of improving German economic momentum has made further near-term GBP/EUR gains more difficult.
GBP/EUR Forecasts: Held Below 1.1700
The Pound to Euro (GBP/EUR) exchange rate briefly hit 1.1700 on Tuesday, but was unable to break through this level and retreated to trade little changed around 1.1685.
Overall risk conditions were solid amid a dip in energy prices which helped the Pound, but stronger than expected German business confidence data underpinned the Euro.
ING still expects a GBP/EUR retreat to 1.15 over the next few months, primarily due to the fact that it is not backing any Bank of England interest rate increases.
There was tentative buying in the UK bond market with the 10-year yield edging back to near 5.00%.
ING commented; “If calm is indeed restored in the bond market, expect the pair to return to tracking short-term rate differentials closely. That could mean a low volatility environment though, as the UK calendar is rather empty for the next couple of weeks.”
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There are, however, still important underlying pressures in the bond market. The yield on the latest 7-year bond auction increased to 4.76% from 4.52% in the July auction and represented the highest yield for over 20 years. In this context, government debt-interest concerns will persist.
Energy prices will also still be watched very closely and the focus on fiscal policy will also be a growing element, especially with Prime MInister Burnham not ruling out tax hikes in the Autumn budget.
The Pound will be increasingly sensitive to fiscal policy commentary over the next few weeks, especially once parliament returns from the Summer recess.
The German IFO business confidence index strengthened to 88.8 for August from 86.6 the previous month and well above consensus forecasts of 87.2.
There were notable improvements in both the current conditions and expectations components.
The IFO commented; “Companies were more satisfied with their current situation, and they revised their expectations significantly upward. Uncertainty continued to decline. Despite another rise in energy prices, the German economy is recovering.”
According to ING; “Despite the obvious headwinds from low water levels, the never-ending war in the Middle East and the struggle to implement the announced reforms, the German economy has developed an unexpected resilience. In fact, it seems on track to achieve the best growth performance since 2022.”
It added; “This morning’s GDP details actually showed that the infrastructure investments have finally started to reach the real economy.”
A stronger German outlook would help underpin the Euro in global markets.
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TAGS: Pound Euro Forecasts
