Pound Euro Exchange Rate Loses Gains as CO2 Solution Fails to Soothe Investors

Pound Euro (GBP/EUR) Exchange Rate Relinquishes Gains as Energy Fears Persist

(Updated 14:45, 21/9/21) The Pound Euro (GBP/EUR) exchange rate has lost today’s gains despite the UK government striking a deal to restart carbon dioxide production to avoid a CO2 shortage impacting the UK’s food supply.

Boris Johnson has confirmed that the government has agreed a deal with CF Industries to restart the production of carbon dioxide, with more details due to be announced later today. Many analysts believe this will be in the form of government subsidies, allowing CF Industries’ fertiliser plants to resume production despite high gas prices making production unprofitable.

However, this has failed to soothe GBP investors’ fears as the UK’s energy crisis is expected to worsen as temperatures drop. As a result, Sterling has retreated against the Euro.

One explanation could be related to concerns over government spending. Public sector borrowing printed much higher than expected earlier this morning, hitting £20.5bn – £4.9bn more than City economists had forecast. With the CO2 shortage likely to be resolved through government subsidies, investors may be worried about a further increase in UK public spending.

Meanwhile, the gas crisis is far from over, with commentators warning that the UK’s fragile energy system will be put under tremendous strain this winter. In his earlier BBC Radio 4 interview, energy secretary Kwasi Kwarteng warned that this ‘could be a very difficult winter’ for households, particularly with the cuts to Universal Credit.

These concerns continue to weigh on Sterling today, with the Pound Euro exchange rate currently trading at €1.1641, down from today’s opening levels.

Original article continues below:

Pound Euro (GBP/EUR) Exchange Rate Firms though Upside May Be Capped 

The Pound Euro (GBP/EUR) exchange rate has made some modest gains today as the UK government attempts to tackle the country’s energy crisis. 

However, a pullback in the US Dollar (USD) is supporting the Euro (EUR) by way of the currencies’ negative correlation, which is limiting the Pound Euro pair’s upside. 

Pound (GBP) Recovers as UK Looks to Resolve CO2 Shortage 

The Pound (GBP) is making a modest recovery today after hitting a two-week low on Monday due to the UK’s ongoing gas crisis. 

The surging price of natural gas in Europe has hit the UK particularly hard, so far causing five small energy suppliers to fold and two fertiliser plants to cease production due to unprofitability. 

Those fertiliser plants also produce carbon dioxide, which is needed to stun animals before slaughter and to extend the shelf-life of meat products, and their closure has led to a CO2 shortage. 

Warnings from industry leaders yesterday that the CO2 shortage could lead to a major food industry crisis, with some saying that the effects would be felt in just ten days, dented the Pound Euro exchange rate. 

Today, however, there seem to be hopes that the UK government will get a handle on the crisis. 

The business and energy secretary, Kwasi Kwarteng, has been in talks with CF Industries – the company that halted fertiliser production – to restart CO2 production. Talking in front of parliament yesterday and BBC Radio 4 today, he has sought to reassure Britons that the UK’s energy issues will be addressed. 

A slightly less risk-averse mood seems to also be allowing the Pound some room to breathe, with Sterling seen as a riskier asset than the single currency. 

In addition, the Confederation of British Industry’s (CBI) industrial trends orders beat expectations, printing at 22 versus the 15 predicted. This may help to further strengthen GBP as the day goes on. 

Euro (EUR) Cushioned by USD Pullback 

The Euro is somewhat subdued today as a lack of Eurozone data leaves EUR investors without much impetus. 

However, the lifting of US restrictions on European travellers may be limiting the Euro’s losses against the Pound. 

Eighteen months after Donald Trump banned non-essential European travellers from entering the US, the Biden administration has finally allowed fully vaccinated travellers to visit America. The news yesterday seemed to boost the Euro, with European travel stocks rising despite yesterday’s dismal day for stock markets globally. 

In addition, a pullback in the US Dollar amid the slight increase in risk appetite may also be cushioning EUR’s downside against GBP due to the negative correlation between the Euro and the US Dollar. 

Pound Euro Exchange Rate Forecast: Energy Crisis in the Spotlight 

With the CBI’s order book balance beating forecasts, the Pound Euro exchange rate may rise further through today’s session. 

However, GBP investors will be keeping a close eye on how the energy crisis unfolds, watching to see how quickly and effectively the UK government can tackle the issue. If the natural gas and CO2 shortages worsen, Sterling could struggle to sustain its upside.