The Pound Euro (GBP/EUR) exchange rate is wavering this morning as GBP investors await the announcement of the new UK Prime Minister.
What’s Been Happening: GBP/EUR Collapses to Two-Month Low
The Euro (EUR) strengthened last week as falling energy prices soothed fears about Europe’s gas crisis. The European Commission announced it was planning an ‘emergency intervention’ to tackle soaring energy costs.
An above-forecast Eurozone inflation rate reading added to EUR’s upside. The hot CPI further increased expectations of a 75-bp interest rate rise from the European Central Bank (ECB) this week.
A downbeat report from Fitch Ratings caused a blip in the single currency’s gains, with the company forecasting a Eurozone recession. However, falling gas prices continued to lift the Euro.
At the same time, the Pound (GBP) faced selling pressure following a new forecast from Goldman Sachs. The bank expects a UK recession starting in the fourth quarter of this year and warned that inflation could hit 22%.
GBP investors also grew increasingly anxious over the cost of government borrowing, with UK bond yields soaring to eight-year highs.
Meanwhile, there were concerns about a possible mismatch in policy approaches from the government and the Bank of England (BoE) as markets mulled the potential impacts of a Liz Truss victory in the Tory leadership contest.
Three Things to Watch Out for This Week
- Tory Leadership Contest
Whoever becomes Prime Minster, they take charge of a country in crisis. Long-awaited policy announcements could cause sharp movement in Sterling. GBP investors are hoping for strong, decisive action.
- ECB Interest Rate Decision
Markets are torn on whether the ECB will raise rates by 50 or 75 basis points. A larger rate hike could boost the Euro, while a softer move may see it slip.
- Gas Prices
Since Russia ceased supplies via the Nord Stream pipeline over the weekend, gas prices have surged. This could weigh on both GBP and EUR.
GBP/EUR Forecast
This week brings some high-impact events with uncertain outcomes. As a result, GBP/EUR could potentially witness significant volatility.