Pound Euro Exchange Rate Firms as EU Recession Worries Dent EUR
(Updated 17:00 13/04/2022) The Pound Euro (GBP/EUR) exchange rate has staged a moderate comeback this afternoon, as worries of a recession in Europe weigh upon the single currency, mitigating earlier GBP downside.
US Treasury Secretary Janet Yellen warned that global economic growth would take a hit from Russia’s war in Ukraine, as prices for food, energy and some metals spike:
‘It is likely to be a hit to global growth,’ said Yellen according to Reuters, at an event hosted by the Atlantic Council think tank. She then added that she ‘worried more about recession prospects’ in Europe, which was most vulnerable to disruptions in energy supplies from Russia.
Original article continues below:
GBP/EUR Exchange Rate Softens as Cost-of-Living Escalates
The Pound Euro (GBP/EUR) exchange rate has slipped this morning as UK inflation exceeds expectations. The UK’s CPI hit 7% in March, the highest it’s been since 1992.
At the time of writing, GBP/EUR is trading at €1.2006, virtually unchanged from today’s opening levels.
Pound (GBP) Succumbs to Pressure on CPI Headwinds
The Pound (GBP) is tumbling against its peers this morning as the UK’s annualised inflation rate for March beat expectations of a rise to 6.7%. Instead, the CPI hit 7% as the cost of imported goods drove prices up.
According to the Office for National Statistics (ONS), the cost of transport recorded the biggest increase, followed by furniture and household services, clothing and footwear, housing and utilities, restaurants and hotels and food and non-alcoholic beverages.
The jump in motor fuel prices is in the spotlight, as average petrol prices hit 160.2p per litre in March 2022, compared with 123.7 pence per litre a year earlier.
The British government already announced a fuel duty reduction of 5 pence per litre for 12 months, starting from March 24th – but economists assess that inflation will stay high for some time as the war in Ukraine rumbles on and energy costs remain elevated while global supply constraints persist.
Economist Simon French of Panmure Gordon warns that inflation could peak at 10% this year:
‘Nothing in today’s UK CPI release for March (showing +7.0% YoY) to change our view that CPI will peak this year at around 10%… Signs of a broadening of inflationary pressures amongst core items and a big leap in input costs, all ahead of the more acute April energy squeeze.’
Euro (EUR) Firms on Variable US Dollar Strength
The Euro (EUR) is climbing against the majority of its rivals this morning despite a lack of significant European data, as variable strength in the US Dollar (USD) inspires single currency upside.
While fears of escalating conflict in Ukraine cap losses for perceived riskier currencies, recession fears limit USD upside, boosting the Euro on account of the currencies’ strong negative correlation. Record-high US inflation data dampened USD trading yesterday, prompting the Bank of America to warn of ‘recession shock’:
‘Inflation is out of control,’ wrote chief investment strategist Michael Hartnett in a note to clients last Friday; ‘Inflation causes recessions.’
Further inspiring Euro tailwinds is speculation the European Central Bank (ECB) could raise rates before the end of the year. Traders and banks have ramped up rate hike bets following the release of minutes from the ECB’s latest policy meeting, which were more hawkish than expected.
The minutes showed some policymakers wanted to go beyond ending bond purchases at some point in the third quarter, by setting a firm end-date; traders have subsequently priced in over 65 basis points of rate hikes by the end of the year, while Goldman Sachs and Danske Bank now expect two 25bps hikes, in September and December.
Pound Euro Exchange Rate Forecast: GBP Losses to Extend on Living Cost Fears?
Looking ahead, a lack of further data from both the UK and the Euro area leaves the Pound Euro exchange rate to trade on external factors for the remainder of the session.
If further reports confirm a build-up of Russian troops at Ukraine’s eastern border, risk-off sentiment could dampen GBP/EUR; meanwhile, the UK’s ‘Partygate’ scandal is likely to weigh upon Sterling as officials and the media call for Prime Minister Boris Johnson to resign.