GBPEUR Rallies as GBP Beats Expectations

The GBPEUR exchange rate charged higher this week after traders unwound bearish bets from the English and Scottish elections. The market this morning saw German inflation numbers come in as expected after strong ZEW readings yesterday failed to ignite the euro. The market is finally waking up to the UK growth forecasts and the pound got another boost with UK GDP beating estimates.

The GBP to EUR opened the week at 1.15 but has now rallied to 1.1650 after the latest data.

German data leads the way for GBP v EUR

ZEW economic sentiment figures for Germany were at their highest in 20 years yesterday as businesses and leaders see a surge in optimism with an improved vaccination campaign in the country. The hopes are high that the economy can rebound in the hard-hit services sectors and add to growth in the Eurozone.

Traders have been looking beyond sentiment readings for more tangible results and sterling is being bid for its strong growth outlook.

Today saw the latest German inflation reading, which was expected to hit the much coveted 2% level and it came in as expected. An ECB policymaker, Isabel Schnabel, said yesterday that German prices could see 3% growth this year in what may be an attempt to distract investors. Schnabel said 2% would be a “short-term fluctuation” and that the ECB’s strategy has to “look through” those figures.

The bank’s Chief Economist Philip Lane also said recently that the ECB’s official “below but close to 2%” inflation target was “symmetric” but not a ceiling. A bond market wobble earlier this year has seen central banks rush to state that any price rises would be transitory, but many investors say otherwise. Today’s reading didn’t overshoot the 2% level so the bank will not be pressured, but the economy is still seeing higher prices despite the ongoing restrictions.

Inflation numbers will be important to watch in the months ahead as the economies reopen and the UK will lead in that respect. The BoE already tapered bond buying last week in advance of such an event, but they wanted to assure markets that there was no change in policy.

UK GDP beats forecasts again

UK GDP came in better than expected this morning with the 3-month average for March being a -1.5% loss. This was better than the -1.7% forecast and we have seen things improve since then.

The figures are said to be driven by the reopening of schools, with child numbers contributing to the calculations of education, there was also a decent recovery in retail sales in March, before stores were given the green light to reopen. Construction was another bright spot with an 8% bounce in February and March, which saw activity rising above pre-virus levels. The BoE predicted 7.2% GDP this year for the UK and these numbers will play into that forecast, so the move today was less pronounced.

The GBPEUR will now look for a move towards the 1.18 highs that were seen in early-April, while the 1.15 level will be support.

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