Pound Euro (GBP/EUR) Exchange Rate Reverses Course amid Cost-of-Living Crisis
(Updated 15:15, 28/4/22) After initially rising, the Pound Euro (GBP/EUR) exchange rate turned south this morning amid more worrying headlines about the UK economy.
Despite many UK firms reporting better-than-expected first-quarter revenues, companies warned that they plan to pass rising costs on to consumers, once again stoking fears about the UK’s cost-of-living crisis.
Economists expect a steep decline in consumer spending this year as UK households see their real incomes fall. Soaring inflation is pushing up prices while wage growth lags behind. In addition, UK citizens also face higher taxes.
These price pressures aren’t just hitting consumers, however. UK firms battered by the Covid pandemic are now having to deal with supply chain snarl-ups and surging costs.
Reporting its latest financial results today, Barclays banking group warned that customers and corporate clients face ‘far harder conditions’. Barclays CEO, C. S. Venkatakrishnan, told shareholders:
‘We remain focused on the impact higher prices are having on our customers and our small business and corporate clients, all of whom are facing far harder conditions this year as a result of inflation, supply chain issues and higher energy costs.’
Following this, the Insolvency Service published some bleak statistics. UK insolvencies are at a ten-year high as firms struggle to stay afloat. In the first quarter of 2022, company insolvencies were 112% higher than in the same period a year before, and the highest recorded since 2012.
Economists are warning that more insolvencies could follow as businesses face increasingly difficult conditions.
This new data has further darkened the UK’s economic outlook, which in turn dampens Bank of England (BoE) rate hike bets. As a result, the Pound (GBP) has slipped against the Euro (EUR).
Original article continues below:
Pound Euro (GBP/EUR) Exchange Rate Makes Modest Gains
The Pound Euro (GBP/EUR) exchange rate is wavering this morning amid an upbeat mood among European investors.
The Euro (EUR) currently seems mixed amid ongoing concerns from Ukraine and possible indications of an earlier rate rise from the European Central Bank (ECB).
Pound (GBP) Buoyed by Upbeat Tone in European Markets
The Pound (GBP) is catching some bids this morning as an upbeat market mood supports the risk-sensitive currency.
Positive first-quarter results from US and European firms have helped markets recover recently, despite ongoing concerns about the Ukraine war, rising inflation, interest rate hikes and Covid outbreaks in China.
Victoria Scholar, Head of Investment at interactive investor, commented:
‘European markets have opened in the green, with positive momentum carrying forward from the overnight session in Asia. Corporate reports are driving price action with a slew of earnings in the US and Europe.’
While this brighter outlook among investors is buoying the Pound, GBP is struggling to make meaningful gains against the Euro. This is in part because the relatively cheery market mood is also lifting EUR.
Euro (EUR) Undermined by Ukraine Worries
As well as the positive tone in European trade, the single currency may be enjoying increased ECB rate hike bets.
The Riksbank – Sweden’s central bank – unexpectedly raised interest rates by 25-bps this morning, leading some analysts to speculate that the ECB may hike even earlier than expected.
Viraj Patel, FX and Global Macro Strategist at Vanda Research, suggests that the Riksbank may have made the move in conversation with their counterparts at the ECB:
However, many economists disagree that the Riksbank hike hints at ECB policy plans. As such, any upside seems limited.
Meanwhile, worries about Russia’s invasion of Ukraine continue to create headwinds for the single currency.
Yesterday, Russian state-owned energy giant Gazprom cut gas supplies to Bulgaria and Poland for not paying the company in Russian Roubles (RUB). Soaring energy costs are behind the bulk of inflationary pressures currently squeezing the Eurozone economy. This move by Gazprom will likely make matters worse.
Pound Euro Exchange Rate Forecast: German CPI in Focus
We may start to see a clearer direction for the Pound Euro pair emerge after Germany’s flash CPI for April.
Germany’s CPI comes ahead of tomorrow’s Eurozone inflation rate. Therefore, markets may use it to try and predict the Eurozone results.
Consensus estimates see German inflation easing by 0.1 percentage points in April. If the CPI prints higher, it could prompt an EUR rally by increasing ECB rate hike expectations.