Pound Euro Exchange Rate Slumps on UK Gas Crunch Concerns

Pound Euro (GBP/EUR) Exchange Rate Plummets as UK Energy Worries Hit the Pound

(Updated 16/9/21, 15:45) The Pound Euro (GBP/EUR) exchange rate has tumbled this afternoon, as a number of headwinds for GBP have caught up with the Pound (GBP).

Firstly, a leading British fertiliser producer has closed two factories as the record-high cost of natural gas makes production unprofitable. The closures come shortly after UK Steel revealed that steelmakers in Britain are having to pause production during peak electricity hours because energy costs are too high.

In addition, one of the UK’s largest power cables, through which the country imports electricity from France, has been forced to shut until March 2022 due to a fire yesterday, further adding to the UK’s electricity woes.

Meanwhile, the Aukus security pact between Australia, the US and the UK – announced last night – has increased tension between the West and China and embittered the relationship between the UK and France.

The new security arrangement sees the UK and US provide Australia with the technology to build nuclear submarines in an attempt to counter Chinese aggression in the South China Sea.

Chinese Foreign ministry spokesman Zhao Lijian has accused the three nations of ‘severely damaging regional peace… and intensifying the arms race’, criticising what he called an ‘obsolete cold war… mentality’ and warning that the countries were ‘hurting their own interests’.

The French government has also expressed anger, as the new pact supersedes a deal it had reconfirmed with Australia only two weeks ago to supply it with submarines. Jean-Yves Le Drian, the French foreign minister, described the move as ‘brutal’ and ‘a stab in the back’.

These economic and political pressures seem to have significantly dented Sterling, with the Pound Euro exchange rate currently trading at €1.1709 – down 0.4% from today’s high of €1.17565 and below this morning’s opening level of €1.1719.

Original article continues below:

Pound Euro (GBP/EUR) Exchange Rate Strengthens on EUR Weakness

The Pound Euro (GBP/EUR) exchange rate is firming today, as fears over China’s economic recovery cause anxiety among EUR investors. 

Sterling, however, may find its gains capped as Boris Johnson’s cabinet reshuffle and rumours of an early election create uncertainty around the Pound (GBP). 

Euro (EUR) Dips as China Worries Grow 

The Euro (EUR) initially slumped this morning as ongoing concerns over the Chinese economic recovery weigh on global markets. 

Yesterday’s larger-than-expected slowdown in Chinese industrial production and retail sales indicated that the recovery in the world’s second-largest economy was losing steam, while a debt crisis at Evergrande, China’s second-biggest property developer, is adding to the angst. 

This is hitting the Euro twofold. Firstly, the US Dollar (USD) is strengthening as worried investors flock to the safe-haven currency. This in turn dents EUR exchange rates due to the negative correlation between the US Dollar and the Euro. 

Secondly, China is the EU’s biggest importer, and Europe’s economy is export-oriented. Furthermore, many luxury European stocks are reliant on wealthy Asian investors, with the European Stoxx 600 falling further than world stocks so far this month. 

In addition, the latest balance of trade figures from the Eurozone have massively missed forecasts. The Euro area’s trade surplus was expected to widen from €18.1bn to €30.2bn, but instead printed at €20.7bn. These disappointing results could add to EUR’s downside as the morning unfolds. 

Pound (GBP) Capped by Political Uncertainty 

Meanwhile, the Pound is managing to firm against the Euro today, though a lack of UK data and political uncertainty may be limiting Sterling’s upside. 

The uncertainty comes following Boris Johnson’s cabinet reshuffle yesterday, which was his biggest restructuring of senior ministers since he became prime minister, and reports suggest he will continue to reorganise his ministerial team today. 

It seems that the reshuffle is geared towards winning a general election, with unpopular minsters sacked and replaced with MPs who are popular among voters. This in turn is adding to rumours that the Conservative Party may be seeking to hold an early election, as MPs have voted through a bill that repeals the Fixed-term Parliaments Act 2011, which removed the prime minister’s power to call an election. 

Such political uncertainty is understandably causing some concern among GBP investors, so this may be capping Sterling’s gains. 

Pound Euro Exchange Rate Forecast: Are the Pound’s Gains Precarious? 

It seems that the Pound Euro exchange rate is strengthening primarily due to the weakness in the Euro, so if EUR sentiment turns around then we may see a reversal. 

This could happen in the afternoon, as some lacklustre US data could dent the US Dollar, thereby relieving some of the pressure on the single currency. 

Additionally, a speech from European Central Bank (ECB) President Christine Lagarde this afternoon may cause some movement, depending on the tone she strikes.