Pound Euro (GBP/EUR) Exchange Rate on the Backfoot as Income Squeeze Tightens
The Pound Euro (GBP/EUR) exchange rate is continuing to fall today as worries about the UK’s cost-of-living crisis grow following yesterday’s central bank meetings.
After the Bank of England (BoE) hiked rates, GBP/EUR surged to a two-year high… only to slump to a nine-day low as the European Central Bank (ECB) sparked rumours of a changing approach to monetary policy. This morning, the Pound Euro pair is at its lowest level since late December.
Pound (GBP) Remains Subdued as Cost-of-Living Crisis Worsens
The Pound (GBP) is struggling against the Euro (EUR) today after yesterday’s tumultuous trade.
One of the factors undermining the Pound is the growing concern over the cost-of-living crisis. Yesterday, Ofgem announced its new energy price cap – a 54% rise on the previous cap – fuelling fears that households face unaffordable energy bills.
The British public is also grappling with rising prices elsewhere and higher taxes due to come into effect in April.
Adding to the anxiety around the cost-of-living crunch, BoE Governor Andrew Bailey said he had a ‘hard message’ for households:
‘We have not raised interest rates today because the economy is roaring away. An increase in Bank Rate is necessary because it is unlikely that inflation will return to target without it.’
Bailey recognised that rising interest rates will add to the squeeze in real incomes across the UK. The BoE forecast that real incomes will shrink by 2% this year and another 0.5% next year – the biggest squeeze on spending power since at least 1990.
Bailey is doing the media rounds today, which is keeping concerns over the cost-of-living squeeze alive. As a result, GBP/EUR maintains its downward trend.
Euro (EUR) Extends Upside following ECB Shift in Tone
Meanwhile, the Euro is enjoying the afterglow of yesterday’s ECB meeting.
While the central bank’s policy remains unchanged, ECB President Christine Lagarde left the door open to a rate hike in 2022. In the press conference following the ECB decision, Lagarde did not repeat her assertion that a rate rise this year was unlikely, instead saying that policy would be data dependent and that officials would reevaluate in March.
Markets took this as a hint that March might herald a shift in policy approach, with a rate rise later this year now likely.
The change in tone comes as earlier this week Eurozone inflation unexpectedly edged higher. Rather than dropping from 5% to 4.4%, as economists had expected, inflation hit a new record high of 5.1%. This challenges the ECB’s view that price pressures are transitory.
A larger-than-expected rise in German factory orders earlier this morning may also be supported EUR. Orders in December rose by 2.8% versus the expected 0.5%.
However, at the time of writing, the Eurozone’s latest retail sales data has just come in. December’s sales contracted by 3% – far worse than the expected 0.5% contraction. This may apply the brakes on EUR’s upside somewhat.
Pound Euro Exchange Rate Forecast: GBP/EUR to Remain on the Back Foot?
For the Pound, the cost-of-living crisis could put pressure on GBP throughout today’s session.
Political turmoil may also act as a headwind for Sterling. Yesterday, four of Boris Johnson’s senior aides resigned, including his policy chief Munira Mirza, who cited his Jimmy Saville smear of Sir Keir Starmer as the final straw. This morning, another member of the Number 10 policy unit has quit.