EUR GBP Holds 0.8500 Level but Weakness Reigns

The EUR GBP exchange rate was higher by 0.02% and was trading above support but the price action is weak. Mixed German ZEW numbers and higher European GDP gave the euro a little support, but the day ahead will likely be quiet ahead of UK GDP tomorrow.

The EUR v GBP trades at 0.8505 and is hovering around that key support.

ZEW sentiment mixed, third quarter Euro GDP beats estimates

The latest German ZEW numbers for December have shown that economic sentiment unexpectedly improved to 29.9 from 31.7, beating estimates of 25.3.

The Current Conditions sub-index slumped to -7.4 in December compared to 12.5 recorded in the previous month and 5.0 expectations. The mixed performance weighed on the euro early, but buyers appeared.

The Eurozone ZEW Economic Sentiment was higher at 26.8 for the current month, compared to 25.9 previously. For the German figures, investors are looking beyond the current sentiment with the ongoing restrictions and the economy is still weighed by supply chain issues.

“The German economy is suffering noticeably from the latest developments in the COVID-19 pandemic,” ZEW President Achim Wambach said, and added that “persisting supply bottlenecks are weighing on production and retail trade.”

“The decline in economic expectations shows that hopes for much stronger growth in the next six months are fading,” Wambach said. In particular, earnings expectations of export-oriented and consumer-related industries in Germany were “assessed more negatively.”

UK joins Russia chorus, CBI warns of costs and shortages

The CBI cut its forecasts for economic growth in the UK due to costs and shortages over recent months. UK GDP is now forecast to grow by 6.9% this year and 5.1% in 2022, but that is down from 8.2% and 6.1%.

At the of 2023, the economy is expected to still be 3% short of where if would have been ahead of the virus lockdowns, according to the business organisation. The downgrade came due to “short-term headwinds – including rising costs and shortages” following the CBI’s previous forecast in June.

Businesses have been stifled by supply chain problems as well as shortages of workers in key sectors such as haulage and food processing. Higher fuel prices and energy bills have also hit the growth prospects with inflation set to hit 5% in coming months.

CBI director Tony Danker said: “Significant headwinds and rising costs of living threaten the extent of recovery and prospects for economic success.”

He also called on more efforts from government, in addition to chancellor Rishi Sunak’s “super-deduction” tax break.

“A one-hit wonder isn’t enough to make up for four decades of underperforming business investment,” he said.

The harsh reality is that continued supply chain issues, rising energy prices and increasing costs means that many are taking further drastic measures to stay afloat. These issues could also be further exacerbated by the new COVID-19 variant.”

Meanwhile, the Prime Minister has said the UK will use “all the economic and diplomatic tools at its disposal” to prevent any invasion of Ukraine by Russia. Ahead of a key meeting between the US President and Russia’s President, Boris Johnson said he and other leaders would show a “united front”.

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