Pound Euro Exchange Rate Sheds Gains ahead of UK Tax Rise Vote

Pound Euro (GBP/EUR) Exchange Rate Turns South as MPs Debate Tax Rise

(Updated 16:10, 8/9/21) The Pound Euro (GBP/EUR) exchange rate has relinquished most of today’s gains as MPs debate the government’s controversial plans to increase employee and employer national insurance contributions by 1.25%.

At the time of writing, parliament is debating the planned hike ahead of a vote later today.

Many business groups and economists have expressed dismay at the plan.

Suren Thiru, Head of Economics at the British Chamber of Commerce, said the increase for employers ‘would be a drag anchor on jobs growth at an absolutely crucial time’. He added:

‘Firms have been hammered by 18 months of Covid-related restrictions and have built up huge debt burdens. This rise will impact the wider economic recovery by landing significant costs on firms when they are already facing a raft of new cost pressures and dampen the entrepreneurial spirit needed to drive the recovery’.

Labour are criticising the tax rise as ‘unfair’, arguing it will disproportionately affect low- and middle-income households as well as small- and medium-sized businesses.

There has also been criticism from Conservative backbenchers, but so far a large Tory rebellion seems unlikely.

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Pound Euro (GBP/EUR) Exchange Rate Holds Near Daily Highs as USD Strength Pressures Euro

(Updated 14:20, 8/9/21) The Pound Euro (GBP/EUR) exchange rate has managed to hold on to this morning’s gains as the recovery in the US Dollar (USD) continues, putting pressure on the Euro (EUR) due to the strong negative correlation between the ‘Greenback’ and the single currency.

The Pound Euro pair opened today’s European session at €1.16298 and then climbed to a daily high of €1.16545. At the time of writing the pair is trading at around €1.1648, 0.15% up from this morning’s opening level.

The strength in USD comes as market sentiment sours, with renewed concerns that the ongoing pandemic could stifle the global economic recovery.

EUR investors may also be reluctant to place bullish bets ahead of the European Central Bank’s (ECB) interest rate decision tomorrow. After last week’s CPI hit a ten-year high of 3%, ECB policymakers are divided over the best course of action.

Governing Council member Robert Holzmann hinted at a sooner-than-expected normalisation of monetary policy, while his colleague Boštjan Vasle argued that ‘highly accommodative’ policy is still needed as the pandemic continues to post a threat to the global recovery.

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Pound Euro (GBP/EUR) Exchange Rate Firms despite UK Tax Rise Concerns

The Pound Euro (GBP/EUR) exchange rate has firmed today, as a strengthening US Dollar (USD) weighs on the single currency. However, Sterling’s gains may be capped as markets digest yesterday’s news that the UK plans to raise national insurance contributions.

Meanwhile, hawkish expectations ahead of the European Central Bank’s (ECB) monetary policy meeting tomorrow may allow the Euro (EUR) to regain lost ground.

Euro (EUR) Undermined by USD Strength

The Euro initially struggled today as it is suffering from its negative correlation to a strengthening US Dollar.

A sharp turnaround in risk sentiment has driven up demand for the safe-haven USD as investors become concerned about a potential slowdown in the global economic recovery following the dismal US non-farm payrolls report last week.

The souring of market sentiment is also caused by rising global coronavirus cases as the Northern Hemisphere approaches autumn, while taper chatter from major central banks is weighing on investor confidence too.

Naeem Aslam, Chief Market Analyst at AvaTrade, commented:

‘The possibility of economic growth slowing down, as hinted by a lower labor market report and rising coronavirus cases, amid tapering discussions among central bank officials, is having a major toll on investor confidence. Moreover, isolated hindrances in combatting the spread of the delta variant may likely dampen hopes of a strong global economic rebound and contribute to higher volatility in stock markets.’

With this shift in market mood boosting USD, demand for EUR has waned somewhat despite hawkish comments from ECB Governing Council member Robert Holzmann.

In an interview with Eurofi Magazine earlier today, Holzmann said that the ECB may normalise monetary policy ‘sooner than most financial market experts expect.’

This hawkish hint comes ahead of the ECB’s interest rate decision tomorrow and following last week’s surging CPI, with Eurozone inflation hitting a ten-year high of 3% – well above the ECB’s 2% target.

In recent days, expectations around the ECB have helped propelled the single currency upwards. Today, they may be limiting the Euro’s losses and could help EUR exchange rates regain ground.

Pound (GBP) Shrugs Off Dismay over Additional Tax Hikes

The Pound (GBP), meanwhile, started the session strong against the Euro, despite concerns that a planned hike in national insurance contributions will damage the UK’s economic recovery and lead to job losses.

On Tuesday, Boris Johnson announced a 1.25% rise in employee and employer national insurance contributions alongside a further 1.25% dividend tax hike. These increases are on top of the tax rises set out in the government’s budget in March, when Rishi Sunak raised corporation tax for the first time in 47 years.

Business groups have warned that the hike comes at a particularly sensitive time and could stifle recovering businesses and force employers to make redundancies.

Stephen Phipson, Chief Executive of the manufacturers’ organisation Make UK, explains:

‘Economic history tells us that job cuts are most likely when the economy starts to open again after a downturn because firms need the capital to reset. After witnessing large scale redundancies at the height of the pandemic and the plug being pulled on the furlough scheme, Government should be putting in place measures to protect jobs and incentivise recruitment.

‘An increase to NI would have the opposite effect. As such Government must examine others streams of raising revenue; we need to nurture growth not put an anchor on recovery.’

Despite these concerns, the Pound Euro exchange rate has managed to recoup some of yesterday’s losses this morning.

Pound Euro Exchange Rate Forecast: Can GBP/EUR Hold Its Ground?

With the recovery of the US Dollar seemingly a key factor in the strengthening Pound Euro exchange rate today, any USD news could affect the pair. This afternoon’s US job openings and economic confidence reports are both forecast to ease slightly compared to their previous months’ reports, but investors will be watching closely for any unexpected results.

As the day progresses it’s possible that the tax hike news will begin to weigh on the Pound more heavily, although Sterling as shown some surprising resilience in recent days.

Meanwhile, any comments or rumours around the ECB’s interest rate decision tomorrow could drive movement in the Euro.

Samuel Birnie

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