Pound Euro (GBP/EUR) Exchange Rate Heads Lower following Spring Statement
(Updated 16:20, 23/3/22) The Pound Euro (GBP/EUR) exchange rate continued to zigzag lower today as investors digested Rishi Sunak’s spring statement.
While some of Sunak’s announcements were welcomed, many commentators feel that his measures will not go far enough to support struggling small businesses and households feeling the cost-of-living squeeze. Opposition politicians and union spokespeople criticised the statement, while economists also expressed concern.
Kallum Picking, an economist at Berenberg bank, argues that the tax burden is going up:
‘In contrast to his claims that he is lowering the UK tax burden, UK Chancellor Rishi Sunak today unveiled a conservative fiscal plan that will raise the UK tax burden to its highest level since 1949.’
Meanwhile, the Office for Budget Responsibility (OBR) has said that living standards are set for a historic fall. The OBR also says that today’s tax rebates and cuts will only offset one third of the painful squeeze households face this year:
‘[Rebates and cuts] offset half the blow to household finances from higher energy and fuel bills and a third of the overall fall in living standards that households would otherwise have faced’.
The OBR also cut growth forecasts for 2022 and 2023.
With investors worried about the outlook for the UK economy, GBP/EUR has slipped today.
However, weakness in the Euro (EUR) may have limited the Pound Euro pair’s losses. Cautious optimism over the Russia-Ukraine war has faded this week, thereby denting the single currency.
At the time of writing, GBP/EUR is trading at around €1.2005, down 0.25% from this morning’s opening level of €1.2034.
Original article continues below:
Pound Euro (GBP/EUR) Exchange Rate Dips amid Soaring UK Inflation
The Pound Euro (GBP/EUR) exchange rate zigzagged lower this morning as anxiety grows over the UK’s cost-of-living crisis.
However, central bank policy divergence and worrying news from Ukraine are weighing on the Euro (EUR). As a result, GBP/EUR could put up a resistance.
Pound (GBP) Slips as UK CPI Fuels Cost-of-Living Fears
The Pound (GBP) fell sharply this morning after the UK’s CPI came in hotter than expected. UK inflation surged from 5.5% to a fresh 30-year high of 6.2%, beating market forecasts of 5.9%.
Increasing prices pressures have fuelled concern about the cost-of-living squeeze in the UK. Households face rapidly rising prices and higher taxes while wage growth lags behind inflation.
This could lead to a drop in consumer spending and a rise in unemployment, which would in turn hurt the UK economy.
The latest figure comes ahead of the spring statement. Chancellor Rishi Sunak is under pressure to alleviate the cost crunch.
Jack Leslie, Senior Economist at the Resolution Foundation, called on Sunak to set out a ‘bold response’:
‘Another sharp rise in inflation last month offers a foretaste of the huge income squeeze coming this year, with inflation likely to hit at least 8 per cent this spring – which could be the highest it’s been in 40 years – along with a second spike this autumn.
‘This prolonged period of high inflation – which millions of people have simply never experienced before – is a complete disaster for living standards. It will mean pay packets continuing to shrink, along with vital income support such as Universal Credit and the State Pension.
‘The Chancellor will need to set out a bold response to this cost of living crisis in his Spring Statement today, starting with ensuring that benefits keep pace with inflation over the coming 12 months, rather than shrink by £10 billion as they are currently on course to do.’
However, while these concerns are weighing on GBP, rate hike expectations could be cushioning the downside. Higher-than-expected inflation could force the Bank of England (BoE) to continue hiking interest rates, despite their dovish tilt at last week’s meeting.
Euro (EUR) Pressured by Downbeat Ukraine Developments
Meanwhile, the Euro is also under pressure today, which may be capping its gains against GBP.
After a run of cautious optimism last week, sentiment around the Russia-Ukraine war has soured again. Negotiations seem to have stalled and analysts are increasingly concerned that Moscow is not genuinely seeking peace.
As the situation in the besieged port of Mariupol grows increasingly dire, Ukraine has accused Russia of seizing a humanitarian convoy trying to reach the city.
Ukrainian President Volodymyr Zelenskiy said: ‘Employees of the state emergency service and bus drivers have been taken captive’, adding that people in the city remain ‘in inhumane conditions. In a total blockade. Without food, water, medication. Under constant shelling, under constant bombing’.
Additionally, in today’s Defence Intelligence update, the UK Ministry of Defence (MoD) said that Russian forces are ‘likely reorganising before resuming large-scale offensive operations’.
With the Euro particularly sensitive to news from Ukraine, these downbeat developments are weighing on EUR.
Pound Euro Exchange Rate Forecast: Spring Statement in the Spotlight
With the UK’s income squeeze tightening, Rishi Sunak’s spring statement will be under intense scrutiny. We could see some significant movement in Sterling as he announces his plans and commentators offer their analyses. If he can successfully allay fears, GBP could regain some ground.
Shortly after the statement we’ll have the Office for Budget Responsibility’s (OBR) economic and fiscal forecast. A gloomy outlook could weigh on Sterling.
As for the Euro, news from Ukraine could dominate the single currency through most of today’s session. This afternoon the Eurozone’s latest consumer confidence indicator is out. If morale slumps due to the ongoing war then EUR could take a hit.