Euro Update – 17 October 2023

GBP
According to the ONS, the UK economy expanded by 0.2% during August, at the same time revising July’s drop lower from -0.5 to -0.6%. Helping to drive the recent increase has been a rebound in the construction industry, coupled with a surprising boost among auto manufacturing. Whilst the rebound during August looks encouraging, the data is only an initial estimate, and could still be subject to revisions further down the line.
Having had a fairly downbeat expectation for UK output during the ill-fated Truss/Kwarteng era, the IMF have also steadily increased their expectations for the UK economy, and they now expect GDP to increase by around 0.5% throughout next year. However, they still believe that the UK will underperform growth of every developed nation including Russia, Germany and Italy over the period, and the risk of stagflation remains real.
In other news, the latest updates on Manufacturing and Industrial production continue to highlight a challenging backdrop, with both metrics falling further over the past month.
In spite of the obvious challenges facing the UK economy, the pound has found some worthy support over the past two weeks, with GBP/USD rising from a cycle low of 1.2050, to as high as 1.2337 earlier in the week, before moderating yesterday (Thursday). During that time, GBP/EUR has also risen steadily towards 1.1600, giving the pound a slight edge over the single currency.
It is a big week for incoming UK economic data next week with the latest Inflation, employment and Retail Sales data all set to impact the pound’s short-term profile.
EUR
Inflation in Europe’s largest economy has now fallen to its lowest level since the start of the Ukraine war. Harmonised CPI rose by 4.3% on an annual basis in Germany during September, according to preliminary data released earlier in the week. Among the data, food price gains have remained robust, rising by 7.5% on an annual basis, against a sharp decline in energy costs over the same period.
Just a day later, the German government cut the prospects for growth, forecasting Germany’s economy to contract by 0.4% throughout this year. In their last update back in April, the government had been expecting the economy to expand by around 0.4%, which perhaps highlights the difficult year for the economy, as it has struggled against high inflation and an ongoing slump in manufacturing, even if lower energy costs may have had less of a detrimental impact. In their latest update, the IMF expect Germany to be among the weakest performing major economies throughout next year, especially if global manufacturing remains constrained.
At the time of writing, EUR/USD has remained fairly flat overall through this week, initially moving back over 1.0600 in conjunction with a broader rally in risk assets, however, the pair has since surrendered much of those gains in the immediate aftermath of the US CPI data.
Looking ahead, the latest inflation updates will be released in France, Spain and Italy over the next few days, with an update on regional inflation released next Wednesday.