Pound Euro (GBP/EUR) Exchange Rate Rises as Truss Plans Spending Package
(Updated 14:00, 6/9/22) The Pound Euro (GBP/EUR) exchange rate rose to an eight-day high today amid reports that the new UK Prime Minster, Liz Truss, is planning a huge government intervention to protect the country from surging energy bills.
Truss is expected to freeze energy bills at around £2,500, which would protect many households from an incredibly difficult winter. This would also limit inflationary pressures and lessen the intensity of the forecast UK recession.
Exclusive:
Liz Truss expected to freeze household energy bills at around £2,500
It will be the £1,971 energy price cap + the £400 universal handout, with a little on top
Cost expected to be around £90bn – coming from general taxation, not energy billshttps://t.co/WTCouv9LmV
— Steven Swinford (@Steven_Swinford) September 6, 2022
Neil Shearing, Group Chief Economist at Capital Economics, commented:
‘If the new Truss government implements a freeze on domestic gas and electricity prices then inflation may peak at around 11% in October this year, rather than 14.5% in January next year as we currently forecast.
‘The economy is still likely to enter recession, but the peak-to-trough fall in real GDP may be more like 0.5% than our current forecast of 1.0%.’
This is giving the Pound (GBP) a lift today, although investors seem hesitant as they await all the details.
Meanwhile, the Euro (EUR) is facing some selling pressure.
Despite a pullback in EU energy prices, EUR investors remain worried about gas supplies. Russia has halted all exports through the Nord Stream 1 pipeline – a vital gas artery into Europe – stoking fears about shortages come the winter.
The Pound Euro exchange rate is currently trading at €1.1658, up around 0.5% from this morning’s low of €1.1601.
Original article continues below:
Pound Euro (GBP/EUR) Exchange Rate Wavers amid Mixed Expectations from Truss Premiership
After strengthening overnight, the Pound Euro (GBP/EUR) exchange rate slipped this morning as markets mull the expected policy plans from Liz Truss, the new UK Prime Minister.
At the time of writing, GBP/EUR is trading around €1.1621, down from overnight highs of €1.1636 but up from today’s low of €1.1601.
Pound (GBP) Wobbles amid Fiscal Policy Speculation
The Pound (GBP) is mixed today as investors remain cautious about UK fiscal policy under Liz Truss.
In support of the Pound, Truss is exploring a ‘major intervention’ on energy bills, according to Chief Secretary to the Treasury Simon Clarke.
Government and industry sources suggest Truss will freeze energy bills before they’re set to soar in October. Such a move could save households and businesses from unaffordable costs.
However, markets are also nervous about some of Truss’s other proposed policies. Planned tax cuts could risk further fuelling inflation, while also forcing the Bank of England (BoE) to continue hiking interest rates well into a recession.
Investors are particularly anxious as the new PM takes charge of a country teetering on the brink of economic turmoil.
Deutsche Bank FX Strategist Shreyas Gopal has warned that tumbling investor confidence could lead to a Sterling crisis:
‘The risk premium on UK [government debt] is already rising, coincident with unusually large foreign outflows. If investor confidence erodes further, this dynamic could become a self-fulfilling balance of payments crisis whereby foreigners would refuse to fund the U.K. external deficit.
‘A balance of payments funding crisis may sound extreme, but it is not unprecedented: a combination of aggressive fiscal spending, severe energy shock, and a slide in sterling ultimately resulted in the UK having recourse to an IMF loan in the mid 1970s.’
With such a febrile atmosphere around the Pound, Sterling may be liable to some volatility.
Euro (EUR) Firms as Energy Prices Fall
Meanwhile, the Euro (EUR) gained some ground this morning as a pullback in EU energy prices took some pressure off the single currency.
Gas prices surged yesterday as markets responded to Friday’s news that Gazprom was indefinitely halting gas supplies to the EU via the Nord Stream 1 pipeline.
Today, however, the energy market seems to have stabilised. At the time of writing, EU gas prices have dropped almost 9% on the day, after surging by up to 30% yesterday.
Economists believe that rising energy costs, primarily caused by disruption to Russian supplies, could trigger a Eurozone recession. As a result, today’s decline in energy prices is supporting the Euro.
However, a broad-based strength in the US Dollar (USD) is weighing on the Euro, due to the currencies’ negative correlation. This could be capping EUR’s gains.
Pound Euro Exchange Rate Forecast: Truss’s Policy Plans in Focus
As the day unfolds, GBP investors may continue to react to reports and rumours about Truss’s economic plans. Any updates about an intervention on energy bills could boost Sterling, although markets will be combing the details to see how such a spending package could impact the wider economy.
For the Euro, movements in the energy market may continue to drive movement. If gas prices continue their decline, EUR could make further gains.
US data later in the afternoon may also impact the Pound Euro pair. If the upcoming US services PMI boosts USD then it could weigh on EUR.