GBP EUR Advances Despite Better German Trade 

The GBP EUR exchange rate was back at the week’s highs despite a better trade balance from Germany. Europe’s largest economy saw a meagre trade surplus, but added an extra five billion euros in net trade. 

The GBP to EUR traded at 1.1970; it is still shy of the 1.2000 level. 

Germany gets some relief with a trade surplus

Germany posted a positive month for trade after the recent trade deficit. 

The country exported €134.3 billion worth of goods in June, which was 4.5% more than in May, according to the federal statistics agency Destatis. The critical indicator was also 18.4 per cent higher than the same month a year previous.

The figures helped Germany to produce a trade balance of €6.4 billion, with the total value of goods coming into the country hitting €127.9 billion. The data also showed that EU countries increased exports by 3.9 per cent, while other countries added 5.3 per cent.

Despite a higher trade balance, export levels for June remain over 40% below the 2021 level, with trade collapsing from the geopolitical tensions. Analysts said higher prices likely drove the current value of exports. Europe’s largest economy is also struggling with zero per cent growth and weak consumer and business sentiment.

The euro is under pressure as Dutch gas futures prices trade at their highest levels since March and may breach the yearly highs in coming sessions. It is only the start of August, and gas futures prices could further strain businesses and consumers long before the winter months. 

Commerzbank warned of “a chain reaction with unforeseeable consequences” if there is a serious gas shortage in Europe. A “severe recession” could hit Germany. They added that it could cause an economic crisis similar “to the one that occurred after the financial crisis in 2009”. 

Bank of England expected to raise interest rates again

The Bank of England now takes centre stage on Thursday. It will likely increase interest rates by 50 basis points, which would be the most significant increase since 1995. 

If the central bank does increase rates by that level, it will bring UK borrowing costs to 1.75%. The UK saw inflation hit 9.4% last month and a Reuters poll of analysts said that 70% now expect the 50bps increase. BoE Governor Andrew Bailey hinted in July that a significant rate rise was “on the table”, and the Federal Reserve’s 75bps hike last week will give UK policymakers some leverage to move again.  

According to ING, the BoE will likely go aggressive this time, with markets already paring back expectations for a “peak” Bank Rate from 3.5% to 2.9%. However, this still implies two additional 50 bp rate hikes by the end of the year. The group predicts a peak of 2% for interest rates compared to the market’s 2.9%. 

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