Euro Soars on Peace Talk Progress, Pound Undermined by Cost-of-Living Concerns

GBP/EUR Exchange Rate: Pound Drops to Three-Month Low vs Euro 

The Pound Euro exchange rate fell to a three-month low this week as worrying comments from the Bank of England (BoE) Governor Andrew Bailey stoked fears over the UK’s cost-of-living crisis. 

On Monday, Bailey warned that Britons are facing a ‘historic shock to real incomes’ this year. He added that this will dent consumer demand and hit the UK’s economic growth. 

His comments come amid growing fears around the country’s cost-of-living crisis. Inflation is at a 30-year high of 6.2% and Rishi Sunak’s spring statement drew criticism for failing to protect households and businesses. With the UK’s economic outlook rather bleak, the Pound Euro pair fell. 

Looking ahead, UK economic data is thin on the ground over the coming week. As a result, the Pound Euro pair may be driven by movement in the Euro and any domestic news about the UK’s cost-of-living crisis. 

GBP/USD Exchange Rate: Pound Capped by Downbeat Economic Outlook 

The Pound US Dollar exchange rate was also heavily impacted by the BoE Governor’s downbeat tone, while a risk-off market mood added to the currency pair’s downside. 

Sterling was able to recoup some losses thanks to a breakthrough in Russia-Ukraine peace talks. This cheered European markets, boosting the riskier Pound and denting the safe-haven Dollar. 

The Pound’s gains seemed limited, however, amid the cost-of-living fears and broad-based strength in the ‘Greenback’. 

Amid a lack of UK data, GBP/USD may trade primarily on risk appetite. If the mood around the Russia-Ukraine crisis continues to improve, Sterling could regain some ground. 

USD/GBP Exchange Rate: US Dollar Underpinned by Hawkish Fed Expectations 

The US Dollar has strengthened against the Pound through the week, with the safe-haven currency initially boosted by a bearish mood among investors. 

The ‘Greenback’ then began to slip as positive news from the Russia-Ukraine negotiations saw risk sentiment improve. 

However, strong US economic data and hawkish expectations from the Federal Reserve continue to underpin USD, limiting its losses. Recently, multiple Fed officials have voiced their support for a more aggressive tightening cycle. Markets now see a 66.6% chance of a 50-bps rate hike at the Fed’s next meeting. 

Economists expect positive results from upcoming high-impact US data releases, including the latest jobs data and ISM PMIs. USD could strengthen if these meet market expectations, particularly if they help to boost rate hike bets. 

EUR/USD Exchange Rate: Euro Hits Monthly High vs US Dollar 

The Euro surged to a monthly high against the US Dollar this week as Russia-Ukraine peace talks made progress, cheering EUR investors. 

Following the most recent round of negotiations, which took place in Turkey, Russia announced that it would ‘radically reduce military activity in the direction of Kyiv and Chernihiv’ in order to ‘increase mutual trust’ and lay the groundwork for a peace deal. 

This is perhaps the first significant de-escalation in the conflict. With the Eurozone highly vulnerable to the economic fallout from the war, the positive news saw European markets rally, thereby boosting EUR. 

The Russia-Ukraine war could dominate EUR exchange rates over the coming week. If Russia does reduce its military activity, the single currency could climb higher. The Eurozone’s latest CPI could weigh on EUR, however, as it’s forecast to jump by 0.7 percentage points to hit a fresh record high of 6.6%. 

Samuel Birnie

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