Pound Euro Exchange Rate Maintains Upside on Rising Commodity Prices, Dovish ECB
(Updated 16:40, 04/03/2022) The Pound Euro (GBP/EUR) exchange rate continued to climb this afternoon, overcoming a brief dip as Euro (EUR) trading sentiment remained bearish.
High commodity prices on account of the war in Ukraine are leading to greater price pressures in the bloc, according to analysts at Nordea bank. In addition, the European Central Bank (ECB) has struck a dovish tone where other central banks are looking to curb inflation with aggressive policy tightening.
In light of this, the single currency fell below $1.10 today for the first time in almost 2 years, hitting a fresh 7-year low against the safe-haven Swiss Franc. Against Sterling, EUR dropped to its lowest level since July 2016.
According to Neil Jones, head of FX sales at Mizuho:
‘Euro remains somewhat at the epicentre of risk aversion.’ Jones added that given surging energy prices and the European Central Bank’s reluctance to change its rate policy, the ‘Euro trend should continue lower.’
Original article continues below:
GBP/EUR Exchange Rate Rises on Weak German Data, Risk-Off Headwinds
The Pound Euro (GBP/EUR) exchange rate is firming this morning following the publication of a weaker-than-expected trade balance report from Germany. Adding to Euro (EUR) headwinds, markets have turned risk averse on news that Zaporizhzhia power station in Ukraine has been seized by Russian forces.
At the time of writing, GBP/EUR is trading at €1.2091, up 0.2% from today’s opening levels.
Euro (EUR) Weakens on Risk-Off Sentiment
The Euro is trading down against its peers today as Germany’s balance of trade revealed a surplus of €3.5bn as opposed to the €9.2bn expected. This marks the smallest trade surplus since December 2000, as exports rose much less than imports.
Also weighing upon the Euro are tensions in Ukraine. Russian forces seized the Ukrainian Zaporizhzhia power station overnight, initially shelling the plant in a move that Western leaders called ‘horrific’ and ‘reckless’.
While the single currency is often resilient when faced with external risk-off pressures, events in Ukraine are damaging EUR sentiment on account of Europe’s reliance upon Russian energy.
The European economy is expected to suffer from such spill-over effects, which could further stoke inflation: the European Central Bank (ECB)’s chief economist Philip Lane noted that the Ukraine conflict may reduce the Eurozone’s GDP by 0.3% to 0.4% this year.
Moreover, the latest geopolitical developments have sunk hopes that the ECB may start normalising monetary policy at its upcoming meeting on 10 March. According to Reuters:
‘The war, by sparking a fresh surge in energy prices, is causing upward pressure on inflation. At the same time it hurts consumption and economic growth.
ECB plans are in turmoil and big decisions on Thursday appear unlikely.’
Pound (GBP) Drops amid Lack of Data
The Pound (GBP), although rising against the Euro, is trending lower against the majority of its peers this morning. Risk-off trading subdues Sterling against its peers, while a lack of UK data further exposes the currency to external factors.
Following the Russian coup at Zaporizhzhia power station, staff have reportedly been allowed to stay on, working and monitoring the units – but experts in other countries are concerned.
Sheffield University nuclear materials expert Prof Claire Corkhill admits to being frightened for the first time this morning, noting:
‘If you want to target their power supply, you attack a building close to the power plant and force operators to shut it down.
We could be looking at a scenario similar to what happened at Fukushima in 2011, where a loss of power led to a loss of cooling, which caused a meltdown of three of its nuclear reactors.’
Lending some support to risk-on currencies are diplomatic efforts from Western foreign ministers, who are gathering in Brussels to assess new ways of supporting Ukraine while maintaining pressure on Russia.
Pound Euro Exchange Rate Forecast: Ukraine Developments to Decide Movement?
Looking ahead, events in Ukraine are likely to provide the main stimulus for currency movement today.
As foreign ministers from Nato, the G7 and the European Union meet to discuss reinforcements of the military alliance’s eastern flank, as well as support for non-Nato countries such as Georgia and Moldova, hopes for a diplomatic solution to the crisis could buoy risk sentiment, lending support to both GBP and the single currency.
Elsewhere, retail data from the Euro area could influence the Pound Euro exchange rate. Sales are expected to have risen by 1.3% in January, potentially applying EUR upside.