Pound Euro (GBP/EUR) Exchange Rate Strengthens despite UK Headwinds
(Updated 15:20, 6/7/22) The Pound Euro (GBP/EUR) exchange rate extended its upside this afternoon, despite headwinds hitting the Pound (GBP).
Following Rishi Sunak’s and Sajid Javid’s resignations last night, more and more ministers have resigned throughout the course of the day. There could be a vote of no confidence as early as tomorrow, with reports suggesting the 1922 Committee may change the rules tonight to allow a second vote. This uncertainty is causing volatility in the Pound.
However, Sterling is strengthening against the weaker Euro (EUR).
One main factor pressuring the single currency today is its negative correlation to the US Dollar (USD). The US Dollar Index – which measures USD’s value against a basket of other currencies – rose to a fresh 20-year high today. This has weighed heavily on EUR.
GBP/EUR briefly touched €1.17 earlier today and is currently just shy of this level.
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Pound Euro (GBP/EUR) Exchange Rate Climbs amid BoE Comments
The Pound Euro (GBP/EUR) exchange rate ticked higher this morning as markets assess the potential impact of two UK cabinet ministers’ resignations. Meanwhile, commentary from two Bank of England (BoE) officials is also boosting the Pound (GBP).
As for the Euro (EUR), Eurozone recession fears continue to trouble EUR investors.
Pound (GBP) Firms as BoE Hints at Bigger Rate Rises
Pound Sterling is gaining ground this morning, despite increased political uncertainty in the UK.
Following the latest sleaze scandal at No 10, Chancellor Rishi Sunak and Health Secretary Sajid Javid both resigned. Their departures have been followed by a flurry of more junior resignations.
Boris Johnson’s position as Prime Minister is now hanging by a thread, and the subsequent political uncertainty is causing some volatility in the Pound.
However, GBP investors seem to approve of the new Chancellor, Nadhim Zahawi. Sunak seemingly favoured a tighter approach to fiscal policy, which often put him at odds with Johnson. Zahawi, on the other hand, has signalled that he may take a slightly different stance.
In particular, Zahawi hinted that he may review plans to raise business taxes next year. The Chancellor said:
‘Of course I will be looking at where else can I make sure the economy remains competitive and dynamic with our European neighbours and the rest of the world as well. Nothing is off the table.’
Meanwhile, hawkish comments from two BoE policymakers are supporting Sterling. Jon Cunliffe said that the bank would act ‘forcefully’ to bring inflation down, while Chief Economist Huw Pill hinted at steeper rate rises. Pill said:
‘An immediate issue for monetary policy makers is whether the pace of policy tightening now needs to change.’
The prospect of faster rate rises from the BoE and a looser approach to fiscal policy from the Treasury are supporting Pound Sterling this morning.
Euro (EUR) Subdued as Recession Risks Loom
Turning to the Euro, EUR exchange rates are muted this morning as Eurozone recession fears hang over investors.
Some relatively upbeat data from Germany gave the Euro a little lift at the beginning of today’s trade. Factory orders in Europe’s largest economy grew by 0.1%, rather than shrinking by 0.6% as was expected.
However, worries about the fragility of the Eurozone economy are weighing on EUR. One key factor afflicting the Euro area economy is record-high inflation, fuelled by energy insecurity.
Markets are increasingly concerned that Russia will continue cutting gas supplies to Europe, which could plunge the continent into a recession.
These ongoing concerns are keeping pressure on the Euro today.
Pound Euro Exchange Rate Forecast: GBP/EUR to Sustain the Upside?
Looking ahead, the Pound Euro pair could experience some volatility today. As things unfold in Downing Street, the political uncertainty – and any new developments – could cause fluctuations in the Pound.
However, with the Euro seemingly weakened, and with BoE policymakers striking a decidedly hawkish tone, GBP/EUR could sustain its upside.
Later on, some US data could have an impact on the single currency. In particular, the minutes from the Federal Reserve’s hawkish June meeting could cause a stir. The Euro has a negative correlation with the US Dollar (USD). Therefore, if USD strengthens then EUR may fall further.