The pound euro exchange rate climbed to a one-month high this week as underwhelming German economic data dragged on the single currency.
Euro undermined by lacklustre German data
The pound euro exchange rate stumbled out of the gate this week. While the single currency was dented by a modest deterioration in German business morale, a bank holiday in the UK resulted in thin trading conditions for Sterling.
GBP/EUR then began to creep higher on Tuesday as German data reported a surprise drop in consumer confidence heading into September as well as confirming that the German economy shrank in the second quarter.
At the same time, the pound drew support from investors adjusting their Bank of England (BoE) interest rate cut expectations. Investors now expect the BoE to cut rates at a slower pace than most other major central banks.
The EUR selloff then gathered pace in the second half of the week with the publication of Germany’s consumer price index. German inflation surprised to the downside in August, cooling from 2.3% to 1.9%. Missing forecasts it would only fall to 2.1% and striking its lowest levels since March 2021.
However, the pound struggled to capitalise on this as speculation over UK Chancellor Rachel Reeves’s upcoming budget triggered some profit taking in Sterling on Thursday.
The end of the week then saw the publication of the CPI figures for the Eurozone as a whole, with the euro extending its losses as they showed inflation in the bloc slowed to 2.2% in August, cementing bets for a European Central Bank (ECB) interest rate cut in September.
German industrial data in focus
Turning to next week, the main catalyst of movement for the pound euro exchange rate may be the publication of the latest industrial data from Germany.
As a key engine of Germany’s economy, the performance of the industrial sector will be closely watched by EUR investors.
If factory orders and industrial production began to slow again in July it’s likely to reignite concerns over the health of the Eurozone’s largest economy, with the potential for German recession fears to sink the euro.
Meanwhile, the only UK data release of note next week will be August’s finalised services PMI. If Wednesday’s index confirms an acceleration in service sector activity it may help to underpin the pound.
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