Pound Euro Exchange Rate Pares Post-BoE Gains

Pound Euro (GBP/EUR) Exchange Rate Slips as Sentiment Sours

(Updated 16:05, 17/6/22) After initially rising this morning, the Pound Euro (GBP/EUR) exchange rate fell today, trimming yesterday’s gains, as the afterglow of the Bank of England (BoE) decision wore off.

The downside came as market sentiment soured, putting pressure on the more risk-sensitive Pound Sterling. European equity markets – often indicative of risk sentiment – initially opened higher this morning but slipped lower in the afternoon. Markets are worried that aggressive rate hikes could cause a global recession amid slowing growth.

The UK economy could be particularly vulnerable to a recession. At the BoE meeting, the UK central bank warned that inflation would rise above 11% in October while forecasting a second-quarter contraction in GDP.

Economists at JP Morgan said:

‘If the [Federal Reserve] engineers a sharp growth slowdown or recession, this would spill over to the UK and, combined with a tightening in domestic financial conditions, likely produce a UK recession.

‘…given the nature of the UK economy, we see high vulnerability to external shocks beyond the near term and see increasing chances of a recession over the next one to two years’.

This downbeat outlook weighed on Sterling today, seeing it largely erase the progress made amid the BoE decision yesterday.

GBP/EUR is currently trading at around €1.1653, down from today’s high of €1.1725.

Original article continues below:

Pound Euro (GBP/EUR) Exchange Rate Stays Strong after Hawkish BoE Decision

The Pound Euro (GBP/EUR) exchange rate is fairly stable this morning, holding on to its gains following yesterday’s Bank of England (BoE) decision.

Meanwhile, the Euro (EUR) is slipping amid worries about the Eurozone’s economy and energy security.

Pound (GBP) Enjoys BoE Tailwinds

The Pound (GBP) is rising today, consolidating its gains following yesterday’s post-BoE rally.

Yesterday, Sterling strengthened, hitting a weekly high against the Euro. The upside came courtesy of some rather hawkish guidance from the BoE. Although the UK central bank only raised rates by 25 basis points, it said it would ‘if necessary act forcefully’ to tame surging inflation, opening the door to a 50-bps rate hike in August.

This seems to be buoying the Pound today, keeping GBP/EUR afloat, despite more warnings about the UK’s cost-of-living crisis.

This morning, Tesco warned of ‘unprecedented increases in the cost of living’ as it delivered its latest trading update.

The supermarket giant said it is starting to see changes in consumer behaviour, with customers buying less food and choosing cheaper products.

Households are coming under increased financial strain as inflation surges towards double digits and wages fail to keep up.

The BoE revised its forecasts yesterday, saying CPI inflation will rise above 11% in October, while GDP is expected to contract by 0.3% over the second quarter of this year.

These worries about the UK economy may be limiting GBP’s gains today.

Euro (EUR) Pressured by Economy and Energy Woes

Meanwhile, the Euro lacks support today.

EUR investors remain concerned about potential fragmentation in the Eurozone as the European Central Bank (ECB) prepares to raise rates.

As the ECB increases borrowing costs, it could have a disproportionate impact on government debt in different Euro area countries. More debt-stressed nations, such as Italy, Spain and Greece, could see repayments rise to unsustainable levels.

In addition, the Eurozone’s energy insecurity is troubling investors. Earlier this week Russian state-backed energy giant Gazprom cut gas supplies to Germany by over 50%. Germany’s economy minister Robert Habeck said the move was ‘obviously a strategy to unsettle and drive up prices’.

Soaring energy costs are the driving force behind record-high inflation in the Euro area, which is squeezing businesses and households and denting economic growth.

Pound Euro Exchange Rate Forecast: Brexit and Economic Concerns to Cap GBP/EUR Gains?

As today’s session unfolds, domestic news is likely to exert the most influence over the Pound.

Any more negative headlines covering the UK’s income crunch could dent Sterling, with the UK economy heading towards a recession.

In addition, Brexit news could also hurt GBP/EUR. Tensions are running high in the Northern Ireland protocol dispute after the UK published legislation that could override parts of the post-Brexit agreement. This prompted the EU to resume legal action against the UK. Any new developments could pressure Sterling.

As for the Euro, its negative correlation to the US Dollar (USD) may come into play later on. Federal Reserve Chair Jerome Powell is due to speak this afternoon. If his comments impact USD, it could affect EUR.

Samuel Birnie

Contact Samuel Birnie


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