Pound Euro (GBP/EUR) Exchange Rate Surges as EU-Russia Tensions Rise

Pound Euro (GBP/EUR) Exchange Rate Jumps from Seven-Month Low as Tensions Escalate

(Updated 15:00, 12/5/22) The Pound Euro (GBP/EUR) exchange rate surged higher today, climbing from a seven-month low, as tensions around the Russia-Ukraine crisis rose.

Pound Sterling (GBP) had fallen to €1.16 in overnight trade – its lowest level since September 2021 – as the Northern Ireland protocol dispute reentered the spotlight.

Recently, the UK has ramped up its rhetoric on scrapping the UK-EU agreement, irking EU leaders. Analysts fear that if the government alters the protocol, the EU will retaliate with trade sanctions, piling further pressure on the UK’s already-stuttering economy.

In addition, this morning’s UK GDP data showed an unexpected contraction in March.

However, GBP/EUR rebounded as European trade began, despite the downbeat GDP report.

The upside came as rising tensions between Russia and Ukraine hammered the Euro (EUR).

Finland has signalled its intention to join Nato, with Sweden likely to follow. In response, the Kremlin – which blames Nato expansionism for its invasion of Ukraine – has responded with aggressive rhetoric.

Former Russian President Dmitry Medvedev said that the move ‘increases the likelihood of a direct and open conflict between Nato and Russia’ and that this could result in a ‘full-fledged nuclear war’.

Meanwhile, Russia’s foreign ministry said:

‘Finland joining Nato is a radical change in the country’s foreign policy.

‘Russia will be forced to take retaliatory steps, both of a military-technical and other nature, in order to stop threats to its national security arising.’

The news highlights just how fragile the situation is. If the conflict escalates, the economic fallout for the Eurozone will be even greater.

GBP/EUR surged from a low of €1.161 to a weekly high of €1.174 today, before easing slightly.

Original article continues below:

Pound Euro (GBP/EUR) Exchange Rate Rises as Ukraine Worries Hit EUR

The Pound Euro (GBP/EUR) exchange rate gained ground this morning, despite an unexpected contraction in UK GDP.

The GBP/EUR upside came amid a sell-off in the Euro (EUR) as investors fear the economic fallout of a prolonged war in Ukraine.

Euro (EUR) Falls as Economic Fears Hit Rate Hike Bets

The Euro slipped this morning, as concerns about a possible economic recession in the Eurozone weigh on the single currency.

Russia’s invasion of Ukraine has battered the bloc’s economy, driving up already-surging prices and exacerbating energy insecurity.

Yesterday, Ukraine shut down two sections of pipeline carrying gas from Russia to Europe citing ‘interference’ from the Russian military. Europe is reliant on Russian energy exports, which have been increasingly politicised and weaponised since the start of the invasion. The latest development underscores just how fragile the Eurozone’s energy security is. While the bloc is pivoting away from Russian fossil fuels, it remains vulnerable in the near term.

With the risk of a damaging energy shock still looming, and the possibility of the conflict escalating, some economists believe that the European Central Bank (ECB) will choose to maintain a relatively accommodative approach to monetary policy.

Despite some hawkish comments from ECB officials yesterday, government bond yields across the Eurozone – often indicative of rate hike bets – are falling.

Vincent Mortier, Chief Investment Officer at Amundi, expects the ECB to focus on managing government borrowing costs rather than fighting inflation. He also expects the Euro to continue declining as a result. Mortier commented:

‘We are facing lower growth or probably a recession in the eurozone… We see the euro at parity [with the US Dollar] in the next six months.’

While markets broadly expect the ECB to start raising rates in July, some analysts believe that the bank will not move very far before pausing its rate hike cycle. And with so much economic uncertainty on the horizon, such a move is not guaranteed.

Pound (GBP) Capped by GDP Contraction

This weakness in the Euro has seen GBP/EUR rise this morning, despite some troubling UK GDP data.

The UK economy unexpectedly shrank by 0.1% in March, while February’s 0.1% growth was revised down to 0%.

The latest data fuels concerns that the UK is sailing into a perfect storm. The economy could contract while inflation surges above 10%, with higher taxes and lower wages eroding households’ real incomes.

These fears are keeping the Pound down against many of its rivals, although it’s firming against the weakening Euro this morning.

Pound Euro Exchange Rate Forecast: Russia-Ukraine Fears to Add to EUR Downside?

For the rest of the session, Sterling’s upside against the single currency could fizzle out. The worrying GDP data could begin to weigh on GBP, while renewed Brexit concerns are also a potential headwind.

That said, any further negative developments from Ukraine could put more pressure in the Euro. Recently, Finland and Sweden have signalled their intentions to apply for Nato membership. Russia previously warned that they would ramp up military activity in the Baltic Sea if the two Scandinavian countries joined Nato.

Dmitry Medvedev, former Russian President and close ally of Vladimir Putin, has responded to the news by saying it ‘increases the likelihood of a direct and open conflict between Nato and Russia’, which could turn into a ‘full-fledged nuclear war’.

Samuel Birnie

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