Pound Euro (GBP/EUR) Exchange Rate Extends Gains in Wake of German Elections

Pound Euro (GBP/EUR) Exchange Rate Continues to Rise as Lagarde Speech Spooks Investors

(Updated 17:30, 27/9/2021) The Pound (GBP) continued to rise against the Euro (EUR) this afternoon as a dovish speech from European Central Bank (ECB) President Christine Lagarde stressed that base effects and energy inflation will not result in lasting overall inflation.

The ECB President remarked that ‘we are seeing limited signs of [stronger price pressures] so far, which means that our baseline scenario continues to foresee inflation remaining below our target over the medium term.’

Investors and parliamentarians had initially suggested that higher inflation may be around to stay: the Bundesbank said earlier today that German inflation was likely to accelerate from already high levels and stay above 2% through mid-2022.

To these, Lagarde responded that the ECB had ‘every reason to believe’ that the rebound in energy prices and supply bottlenecks would ease next year, thereby reducing inflation.

Original article continues below:

Pound Euro Exchange Rate Rises Despite Growing UK Fuel Concerns

The Pound Euro (GBP/EUR) exchange rate has catapulted up this morning in the wake of Germany’s elections yesterday. The race to succeed long-serving Chancellor Angela Merkel has resulted in a fragmented parliament with finance minister Olaf Scholz in charge, with a ‘clear mandate’ to form a new government.

At the time of writing, GBP/EUR is trading at €1.1708, up 0.4% from today’s opening levels.

Euro (EUR) Plummets on German Government Uncertainty

The Euro (EUR) has fallen against the majority of its peers this morning as EUR investors trade with hesitancy following Germany’s election results.

Germany’s centre-left candidate Olaf Scholz won the election by a narrow margin against the centre-right Christian Democratic Union (CDU) party: the most likely outcome is now a coalition between Scholz’s Social Democratic Party (SPD), the Greens and the Free Democratic Party (FDP).

Any possible coalition must be pro-European, as the extreme-right Alternative for Deutschland (AfD) is banned by other parties; the next government must also include the business-friendly FDP, which could moderate any ambitious fiscal spending.

Still, uncertainty over the election’s ultimate outcome weighs upon trading sentiment- for one thing, the outgoing chancellor Angela Merkel is going nowhere until the coalition is formed.

According to Björn van Roye, a Senior Global Economist:

“Long and arduous negotiations lie ahead before a coalition government can emerge. That’s likely to mean an extended period of uncertainty for financial markets as well as economic and fiscal policy.”

Pound (GBP) Firms on BoE Hawkishness and USD Uncertainty

The Pound (GBP) is climbing this morning against the majority of its peers despite growing fuel and supply chain concerns.

Edwin Atema, head of research and enforcement at the Federation of Dutch Trade Unions, which represents drivers across the EU and Europe, has also rejected the UK’s short-term via allowance for foreign drivers to return to work in Britain until Christmas:

‘The EU workers we speak to will not go to the UK for a short-term visa to help the UK out of the [mess] they created themselves.’

In spite of these headwinds, the Pound has found support on hawkishness from the Bank of England (BoE) and uncertain trading around the US Dollar (USD).

The ‘Greenback’ has room to fall as the Evergrande crisis seems to be under control: China’s second-largest property developer is unlikely to pay all its debt, but is now under close government scrutiny as Beijing has made project completion a top priority.

A return to less risk-averse trading bodes poorly for the safe-haven USD, while supporting the US Dollar’s risk-on peers.

BoE tailwinds have also persisted in the wake of last week’s interest rate announcement from the central bank. Two members of the Monetary Policy Committee (MPC) have voted to cut short debt purchases already, as the bank’s representatives hinted that interest rates could rise even before the BoE completes its bond-buying scheme.

Pound Euro Exchange Rate Forecast: Direction to be Found on Central Bank Speeches?

Looking ahead, speeches this afternoon from European Central Bank (ECB) President Christine Lagarde and BoE Governor Andrew Bailey may direct immediate trading sentiment. Further speeches tomorrow and Wednesday could extend losses or gains based on the speakers’ tone.

BoE consumer credit on Wednesday could potentially buoy the Pound, while German inflation data on Thursday is likely to be the main driver of movement. If inflation rises to 4.2% as expected – 2.2% above the ECB’s target of ‘close to, but below 2%’ – the ECB may be driven to hawkish measures.