Pound Slips on Possibility of UK-EU Trade War, Euro Falls Despite Hawkish Assurances from ECB

  • UK passes NI Protocol legislation

  • Pound slips as inflation climbs higher

  • Recession fears push US Dollar lower

  • Euro falls despite hawkish ECB rhetoric

GBP/EUR Exchange Rate Slips as MPs Pass NI Protocol Bill

The Pound Euro (GBP/EUR) exchange rate fell over the past seven days. Widespread rail strikes that began on Wednesday prompted concerns of a short-term downturn to the UK’s hospitality and services sectors.

The loss of two byelections for the Conservatives on Thursday may have also weighed on Sterling as rebel MPs looked for new ways to depose PM Boris Johnson.

Brexit-related headwinds may have also dented confidence in the Pound over the past seven days. On Monday, the UK passed legislation that would enable it to make unilateral changes to the Northern Ireland Protocol. The move was widely criticised by EU ambassadors, and heightened prospects of a potential UK-EU trade war.

Looking ahead, the prospect of further industrial action across the UK could place additional pressure on the currency. Additionally, further developments surrounding the NI Protocol could also harm confidence in Sterling.

GBP/USD Exchange Rate: Inflation Climbs at Fastest Rate in 40 Years

The Pound US Dollar (GBP/USD) exchange rate saw some volatility over the past week. The Pound slipped initially on Wednesday after inflation for May printed at 9.1%. The figures prompted investors to pare back bets on future Bank of England (BoE) rate hikes. A drop to private sector growth also pushed GBP lower on Thursday.

Sterling managed to recover some of its losses on Friday, however. May’s retail sales fell by less than forecast which helped improve the mood surrounding GBP. A pick up in risk appetite also helped the Pound to tick higher toward the end of last week.

A speech from BoE Governor Andrew Bailey on Wednesday could cap gains for GBP if he maintains a cautious tone. The final reading of first quarter GDP figures on Thursday could reinforce concerns over the UK economy’s long-term prospects if they print lower than forecast. This could also prompt a fall in Sterling.

USD/GBP Exchange Rate: Powell Warns of Recession Risks

The US Dollar Pound (USD/GBP) exchange rate climbed higher over the past seven days. The US Dollar began on the backfoot however, as a downturn to US Treasury bond yields and recession fears weighed on the currency. Appearing before Congress, Federal Reserve Chair Jerome Powell testified that aggressive rate hikes could push the US into an early recession.

A healthy risk appetite likely also capped gains for USD. Reports that China would be easing its Covid-19 travel restrictions helped to bolster market sentiment.

A recovery to bond yields and aggressive dip-buying later in the week helped USD to recover, however, with similar trends lending support to the US Dollar through the first half of this week.

A speech from Fed Chair Powell on Wednesday could prompt movement in the currency depending on how investors perceive his comments. An uptick to the PCE price index on Thursday could bolster USD exchange rates if it strengthens Fed interest rate hike bets.

EUR/USD Exchange Rate: ECB Signals Rate Hikes on the Cards

The Euro US Dollar (EUR/USD) exchange rate dropped over the past seven days despite a hawkish stance from the European Central Bank (ECB).

Speaking on Tuesday, ECB President Christine Lagarde signalled that the central bank would be hiking interest rates at their upcoming meetings.

Poor PMI figures on Thursday for both the Eurozone and Germany likely helped to push the single currency lower. A fall in German business optimism for the second consecutive month may have also caused EUR to exhibit some weakness.

Finally, a recovery to the US Dollar on Tuesday may have sapped demand for the single currency.

A speech from ECB President Lagarde on Wednesday could help to bolster the Euro if she maintains a hawkish stance. High inflation figures for both Germany and the Eurozone this coming week could also push EUR higher.

Gareth Monk

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