Sterling touched a multi-month high versus the euro this week, in part because the UK and the EU at last signed a Brexit deal. However, another factor that’s contributed to the pound’s strength versus the common currency is the euro bloc’s continuing economic weakness, especially in Germany.
Looking ahead, the International Monetary Fund (IMF) has cut its economic growth outlook for the Germany in 2019/20, while incoming European Central Bank (ECB) President, Christine Lagarde, may further ease monetary policy, to prop up the bloc.
This week we learnt that Eurozone inflation fell by -0.2% to 0.8% in September, according to Eurostat. This was well below the ECB’s official target of close-to-but-below 2.0%. This is a three-year low in Eurozone price pressures, which tells us that the euro bloc remains too weak to generate consistently higher prices, like the central bank aims for.
As a result, it’s quite possible that Mrs. Lagarde, who’ll replace outgoing ECB President Mario Draghi, will try to cut interest rates further below their current 0.0%, and expand the ECB’s Quantitative Easing (QE) beyond its €30 billion a month.
The ECB’s German representative, Sabine Lautenschlaeger has already quit her post over the Central Bank’s decision to ease monetary policy further last month. So, more interest rate cuts would be quite controversial.
Elsewhere, it’s worth noting that German investor confidence fell less than forecast in October, according to trusted economics watchdog ZEW this week, though it’s still close to nine-year lows. To be specific, ZEW’s German economic sentiment this month fell by -0.3, to -22.8. This is well above market forecasts for -27.0, yet still the worst result since 2010.
According to ZEW’s President Achim Wambach, “The recent settlement in the trade dispute between the USA and China does not seem to diminish economic scepticism at this stage.”
Germany’s Gross Domestic Product (GDP) growth is now forecast at just 0.5% in 2019, while it’s quite possible that the Eurozone powerhouse will enter recession too. In addition, exports in the wider Eurozone fell by -2.2% in August year-on-year, which may weaken the bloc’s GDP outlook.
Expect volatility on sterling exchange rates ahead of the key Brexit vote in UK parliament tomorrow, you may wish to get in touch with you account manager if you have an upcoming currency transfer.
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