Pound Euro Exchange Rate Rallies following UK’s Energy Price Guarantee Announcement

Pound Euro (GBP/EUR) Exchange Rate Rebounds as Truss Announces Energy Crisis Aid

(Updated 15:20, 8/9/22) The Pound Euro (GBP/EUR) exchange rate recovered from a 16-month low today as Prime Minister Liz Truss announced her Energy Price Guarantee – a plan to protect UK households and businesses from soaring energy bills.

The response to Truss’s plans have been generally positive, as economists believe the measures could soften or even prevent the expected UK recession.

However, the plan did face criticism. In particular, economists are concerned that the announcement came without any costing. Instead, Truss said Kwasi Kwarteng, the new Chancellor of the Exchequer, will detail the costs later this month.

As Truss has ruled out a windfall tax on energy companies’ bumper profits, the package – estimated at £180bn or more – will likely need to be borrowed. This adds further strain to the public finances, which are still reeling from Covid, while borrowing costs soar.

These concerns have limited the Pound’s (GBP) upside.

However, GBP/EUR has also received a boost from the European Central Bank (ECB) interest rate decision. Although the ECB raised rates by 75 basis points – it’s largest-ever hike – the bank also slashed its growth forecasts.

In addition, ECB President Christine Lagarde warned of a ‘really dark downside scenario’ in which the Eurozone faces energy rationing and a recession. These downbeat comments dented the Euro (EUR), adding to GBP/EUR’s gains.

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Pound Euro (GBP/EUR) Exchange Rate Pressured as Investors Await Big Events

The Pound Euro (GBP/EUR) exchange rate is struggling today, trading at its lowest levels since May 2021, as markets brace for the European Central Bank (ECB) interest rate decision and UK Prime Minister Liz Truss’s energy support announcement.

At the time of writing, GBP/EUR is around €1.1498, having wavered around €1.15 for most of the morning.

Pound (GBP) Muted as Recession Fears Remain

The Pound (GBP) is on the back foot this morning as GBP investors worry about the impending UK recession, despite an expected support package from the government.

Yesterday, Bank of England (BoE) Governor Andrew Bailey warned that a recession is still the most likely scenario for the UK, shattering the fragile optimism around Truss’s reported plans to freeze energy bills.

In addition, fellow BoE policymaker Silvana Tenreyro argued that the pace of rate hikes may need to slow as the economy falters.

Following these comments, expectations for a 75-bp interest rate rise at the bank’s next meeting softened, thereby denting the Pound. Sterling is still struggling with these headwinds today.

Furthermore, markets are growing concerned about how Truss will pay for her energy aid package, which could exceed £100bn.

Truss has said she wants to cut taxes and has ruled out an extended windfall tax on energy companies. Therefore, the plan will likely be paid for by borrowing.

But economists are already deeply concerned about the state of the UK deficit. Soaring inflation and rising interest rates have pushed government borrowing costs to alarming levels.

With GBP investors anxious about government borrowing and a likely recession, while also trimming BoE rate rise bets, Sterling is subdued this morning.

Euro (EUR) Hushed ahead of ECB Rate Decision

Meanwhile, the Euro (EUR) is rather quiet as markets brace for the ECB decision.

Most commentators expect a jumbo 75-bp rate rise from the European Central Bank, but there is a chance policymakers could opt for a smaller half-point hike.

In addition, the Eurozone economy remains in a perilous state. Surging energy prices and the possibility of a full cut-off of Russian gas in the winter threaten a recession.

Against this backdrop, EUR investors are exercising some caution this morning.

Pound Euro Exchange Rate Forecast: Big Movements Ahead?

Today, these two high-impact events – Liz Truss’s energy bill bailout and the ECB interest rate decision – will likely dominate the Pound Euro exchange rate.

Truss’s spending plan will face intense scrutiny. Analysts will be looking at how much support the plan offers, whether it will affect inflation, and what the impact will be on public finances.

If the support package is received favourably, it could give Sterling a significant boost. UK households and businesses hope that the intervention will protect them from soaring costs this winter and lessen the severity of the looming recession.

However, if there are fundamental problems with Truss’s plan then the Pound could falter.

Meanwhile, a larger 75-bp rate rise from the ECB could see the Euro strengthen. That said, markets will also be anxious to find out whether more rate rises are likely, or if the ECB is front-loading hikes before economic conditions deteriorate.

ECB President Christine Lagarde will deliver two speeches following the decision, including the ECB press conference. If she sounds cautious or worried about the Eurozone economy, this could trim any gains for the single currency.

Samuel Birnie

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