The British pound is lower against the euro on Monday afternoon having reversed early gains before turning negative. A surprise drop in German business sentiment according to survey data saw the euro lose value early on but the losses were quickly undone by speculation that the Bank of England could still opt to lower interest rates this week. Elsewhere global markets were in the red on the threat of contagion from the coronavirus outbreak in China, with stock markets in both Europe and United Kingdom lower.
GBP/EUR was lower by 10 pips (-0.08%) at 1.1848 with a daily price range of 1.183 to 1.189 as of 1pm GMT, with the currency pair up nearest its highest level in the past 5 days and not far from year-to-date highs.
German economic data was the impetus for the initial weakness in the euro. Business confidence in Germany had been improving in the final three months of 2019 thanks in part to the phase one trade deal between the US and China. So it came as a bit of shock when German business lost confidence again in January.
Business ‘expectations’ according to the IFO saw a surprise fall to 92.9, below the 93.9 reported previously and 95 forecasted by economists. Comments from US President Donald Trump, including recently at the World Economic Forum in Davos Switzerland that he is turning his attention next on Europe could go some way to explain the miss.
The more cautious outlook from German businesses adds to a gloomy backdrop for the euro. The single currency slid sharply last week following an ECB meeting that lacked clarity. Speculation in some corners that the strategic review implemented by new ECB President Christine Lagarde would see negative interest rates or quantitative easing (QE) reversed is fading fast.
The decision for some UK policymakers at this week’s Bank of England meeting is on a knife edge. Recent incoming data including PMIs and employment support the view to leave rates as they are, while slow growth and Brexit uncertainty could justify a rate cut.
