Pound Euro Exchange Rate Extends Decline as Risk-On Mood Fails to Support GBP
(Updated 16:00, 02/09/2022) The Pound Euro (GBP/EUR) exchange rate continues to trend down through today’s session, pressured by soaring energy bills and the implications for Britain’s business sector.
While economists’ focus has recently centered around the experience of households on lower incomes, attention shifted this afternoon to encompass employees and UK companies – both large and small. Union representatives at picket lines all over the country stress that ‘people have had enough’: in Felixstowe, dock workers on strike consider that Britain’s next Prime Minister has an impossible task ahead of them.
Charities and several politicians concur that neither Liz Truss nor Rishi Sunak seem to have grasped the severity of the situation. Sharon Graham, the general secretary of Unite, told reporters:
‘I don’t think they understand what’s coming. We can talk about whether the Tories ever get it, but I really think today they don’t get it.’
Headlines this afternoon reflect the growing feeling of discontent in Britain as confidence falls among consumers and businesses. ‘Britain is in a mess’ claims one news source; ‘a storm is coming’.
Original article continues below:
GBP/EUR Exchange Rate Drops as UK Recession Fears Escalate
The Pound Euro (GBP/EUR) exchange rate is sliding lower this morning despite a disappointing trade balance release from Germany. Pound (GBP) weakness is in the spotlight today as economists warn Sterling could hit a 37-year low against the US Dollar (USD).
At the time of writing, GBP/EUR is trading at €1.1576, down 0.2% from today’s opening levels.
Euro (EUR) Climbs Following German Trade Balance Release
While July’s German trade balance missed expectations of €6.2bn, printing instead at €4.9bn, the Euro (EUR) has so far managed to retain strength on hawkish bets for the European Central Bank (ECB).
Yesterday, Reuters’ economists observed that money markets in the Eurozone are now pricing in an 80% chance of a 75bps rate hike next week. According to a Bloomberg survey:
‘The European Central Bank remains behind the curve on tackling record euro-zone inflation and will have to act more forcefully than previously envisaged to wrest control of prices.’
A statement from the CEO of France’s leading gas importer failed to significantly dampen EUR trading sentiment despite its grim tone. Catherine MacGregor told RTL radio that the world of energy would never be the same again, adding: ‘This is why the message of energy sobriety remains extremely important.’
Supporting the single currency somewhat may be moderate weakness in the US Dollar. Ahead of this afternoon’s non-farm payrolls release, the ‘Greenback’ is trading in a narrow range against its peers.
Economists at OCBC bank remark that strong payrolls data could trigger renewed EUR selling while lending support to the world’s largest economy.
Pound (GBP) Dented by Downbeat Economic Analyses
The Pound has succumbed to pressure against several peers this morning as the British Chambers of Commerce (BCC) claims the UK economy is already going into a recession.
Highlighting current pressures facing Sterling, the body warns that the country will be in recession before the end of the year, stating frankly: ‘We still believe, currently, that we are going into recession now.’
Baroness Ruby McGregor-Smith, President of the BCC, elaborates:
‘We’re not just talking about big businesses, many of whom are going to really, really struggle. We’re talking about more and more and more SMEs, which are the lifeblood of our economy. So they need more support now, as they did during Covid.’
McGregor-Smith’s comments follow yesterday’s press release, in which Alex Veitch, Director of Policy at the BCC, stressed that government action is needed now – including such measures as a Government Emergency Energy Grant, a temporary cut in VAT on energy bills and increased regulation via Ofgem.
Illustrating the effect of such analyses on GBP exchange rates, Kit Juckes of Société Générale summarises: ‘The UK economy is in recession, the balance of payments is catastrophic and more/faster rate hikes won’t do much to restore confidence.’
The Pound is reported to be at risk of hitting its lowest level against USD since 1985 and is also trading significantly lower against the Euro, compared with the start of August.
GBP/EUR Exchange Rate Forecast: EUR to Climb on US Data?
Looking ahead, a lack of domestic data in either the UK or the Eurozone this afternoon leaves GBP/EUR to trade on external factors. USD dynamics are likely to influence Euro trading, given the currencies’ strong negative correlation.
If non-farm payrolls in the US increased in August by 300K as forecast, the ‘Greenback’ could firm, depressing EUR: subsequently, the Pound Euro exchange rate may tick up.
Elsewhere, if modest risk-on sentiment persists the Pound may find some support, capping losses for the currency.