GBP/EUR Exchange Rate: Pound Slumps on UK Cost-of-Living Crunch
The Pound Euro exchange rate plunged at the end of last week and has failed to recover since on concerns over a cost-of-living crisis in the UK causing weak economic growth.
Against the backdrop of soaring prices, tax increases, and wage growth falling behind inflation, the UK energy regulator Ofgem’s decision to raise the price cap to 54% and massively increase energy bills fuelled fears of a household income squeeze.
GDP data for the UK in December released on Friday may provide early evidence of these growth concerns, with a -0.6% contraction expected.
Another higher-than-forecast inflation reading in January’s data released next Wednesday will likely add volatility to GBP/EUR, with investors pricing in the impact of higher prices to consumers and the Bank of England (BoE) adopting a more hawkish approach to tightening monetary policy.
GBP/USD Exchange Rate: Pound Retreats on BoE Forecasts
The Pound US Dollar exchange rate jumped in the aftermath of the BoE monetary policy committee (MPC) voting 5-4 in favour of raising interest rates to 0.5% from 0.25%.
With the four voting against the hike preferring a larger rise to 0.75%, and the MPC unanimously agreeing to begin quantitative tightening of the BoE’s £875 billion of asset holdings, the central bank’s more hawkish stance boosted GBP/USD.
However, Sterling soon slumped on gloomy forecasts from the BoE of inflation peaking above 7% around April, ‘slow to subdued rates’ of growth, and a ‘reduction in real income’.
Jobs data released next Tuesday may further weigh on GBP as forecasts point to wage growth falling further behind inflation, likely heightening concerns over the impact on consumer spending and in turn economic growth.
Political developments in the UK will also continue driving GBP/USD movement as uncertainty lingers over Prime Minister Boris Johnson’s future, and instability in Northern Ireland’s Assembly threatens to grow after the DUP acted on their objections to the Northern Ireland Protocol.
USD/GBP Exchange Rate: US Dollar Support Underpinned by Surprise Payrolls
The US Dollar Pound exchange rate fell towards the end of last week after the ISM non-manufacturing PMI showed service sector activity fell to an 11-month low.
However, USD rebounded going into the weekend after the release of bumper non farm payrolls data for January.
Payrolls data revealed the US economy unexpectedly added 467,000 jobs last month, providing evidence to investors that the Federal Reserve may opt for a larger rate hike in March than previously anticipated, boosting US Treasury yields and the US Dollar.
Expectations for more aggressive monetary policy tightening from the Fed may increase again tomorrow as forecasts point to inflation having risen to 7.3% in January.
However, consumer confidence for February remaining near the lowest levels since November 2011 set for release on Friday may limit the ‘Greenback’s strength.
EUR/USD Exchange Rate: Euro Jumps on ECB Shifting Policy Stance
The Euro US Dollar exchange rate surged at the end of last week after the European Central Bank (ECB) signalled a shift in its policy stance on inflation and raising interest rates following its rate decision.
After maintaining in recent months that inflation will be ‘transitory’, ECB President Christine Lagarde said the ‘situation has changed’ and failed to say a rate hike in 2022 would be ‘unlikely’, which appeared to open the door to a rise in rates this year.
However, the Euro wavered slightly this week after Lagarde signalled a ‘gradual’ shift in policy, and would not raise rates until the end of its asset purchases which it is ramping up during the second quarter.
Further comments from ECB policymakers on the likelihood of tightening monetary policy will continue driving EUR movement, while an uptick in the ZEW German economic sentiment surveys may provide support.