Pound Euro (GBP/EUR) Exchange Rate Extends Upside amid Risk-On Mood
(Updated 16:45, 10/11/22) The Pound Euro (GBP/EUR) exchange rate continued to climb today, eventually recouping almost all of yesterday’s losses. At the time of writing, GBP/EUR is trading at €1.1475, up more than 1% from its overnight lows.
The initial upside in GBP/EUR came amid hopes of a resolution to the Northern Ireland Protocol dispute and concerns about the Eurozone economy.
Sterling then managed to extend its gains after US inflation eased more than forecast. The prospect of less aggressive action from the Federal Reserve triggered a rally in global markets, which in turn boosted the riskier Pound (GBP) against the safer Euro (EUR).
In addition, the softer inflation print saw UK government bond yields ease. This puts the public finances in a healthier state ahead of the government’s long-awaited fiscal statement next week.
However, the Euro’s negative correlation with the US Dollar (USD) – which plummeted – lent the single currency some support and may have capped GBP/EUR’s gains.
Looking ahead, Sterling’s strength may be short-lived. The first estimate of the UK’s GDP growth rate for the third quarter of 2022 is out early tomorrow morning. Economists expect it to reveal a 0.5% contraction in the UK economy, which would reinforce the Bank of England’s (BoE) assessment that the country is in a recession.
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Pound Euro (GBP/EUR) Exchange Rate Firms as Sunak Meets Irish Taoiseach
The Pound Euro (GBP/EUR) exchange rate strengthened this morning as markets grew hopeful of a solution to the Northern Ireland Protocol dispute.
At the time of writing, GBP/EUR is trading at around €1.1425, up almost 0.7% from its overnight lows.
Pound (GBP) Firms amid Northern Ireland Optimism
The Pound (GBP) ticked higher this morning as UK Prime Minister Rishi Sunak set off to meet his Irish counterpart, Taoiseach Micheal Martin, at the British-Irish Council summit.
Sunak is the first PM to attend the summit since Gordon Brown in 2007, which suggests that frosty UK-Ireland relations are thawing. This in turn has raised hopes that the two sides will take a constructive approach to resolve the dispute over the Northern Ireland Protocol.
The Protocol threatens to open old wounds in Ireland, with unionists fiercely opposed to the Brexit agreement.
Furthermore, tensions between the UK and the EU around the Protocol have bubbled up over the past year. With the British government threatening to unilaterally suspend the agreement, markets have feared a possible UK-EU trade war.
Today’s meeting is seen as a step in the right direction, with GBP investors cautiously hopeful that the deadlock over the post-Brexit agreement can be broken.
Euro (EUR) Slips following ECB Economic Bulletin
Meanwhile, the Euro (EUR) is struggling this morning following the European Central Bank’s (ECB) latest Economic Bulletin.
In its final update of 2022, the ECB outlined the worrying risks facing the Eurozone economy:
‘The incoming data confirm that risks to the economic growth outlook are clearly on the downside, especially in the near term. A long-lasting war in Ukraine remains a significant risk. Confidence could deteriorate further and supply-side constraints could worsen again. Energy and food costs could also remain persistently higher than expected. A weakening world economy could be an additional drag on growth in the euro area.’
The bank also reiterated that future interest rate decisions would be ‘data-dependent’ and taken on a ‘meeting-by-meeting’ basis. Therefore, the troubling downside risks may have markets trimming expectations for further ECB rate rises.
Pound Euro Exchange Rate Forecast: Central Bank Dynamics to Dent Sterling?
Later this afternoon Silvana Tenreyro, an external member of the Bank of England’s (BoE) Monetary Policy Committee (MPC), is due to speak. Tenreyro is one of the most dovish members of the MPC, having called for a smaller 25bps interest rate rise at the bank’s last meeting. As such, she may advocate a slower pace of tightening and express concern over the UK’s economic trajectory. Such comments could weigh on the Pound.
US inflation data could also impact the Pound Euro pair. If American price pressures ease, as markets expect, the US Dollar (USD) could decline. As EUR is negatively correlated with USD, this may provide the single currency with a lift.