Pound Euro (GBP/EUR) Exchange Rate Ticks Up from Near-Weekly Low

August 18, 2022 - Written by John Cameron

STORY LINK Pound Euro (GBP/EUR) Exchange Rate Ticks Up from Near-Weekly Low

GBP/EUR Exchange Rate Rises amid Post-Inflation EUR Slump

The Pound Euro (GBP/EUR) exchange rate is climbing so far today despite headwinds in both the UK and the Euro area. Euro (EUR) investors appear to have interpreted finalised inflation data negatively, as today’s reading printed as expected at 8.9%.

At the time of writing, GBP/EUR is trading at €1.1850, up slightly from today’s opening levels.

Euro (EUR) Subdued by EU Energy Crisis

The Euro is weakening against several peers today, as the bloc’s inflation rate prints as forecast and construction output in the Eurozone misses estimates for the year to June. Also suppressing EUR demand are ongoing energy headwinds and other threats to economic growth.

July’s finalised inflation reading remains lower than the UK’s, which printed yesterday at 10.1% for the same period. Nevertheless, it still reflects surging prices across imported food, alcohol and tobacco – as well as energy.

Reporters note that inflation varies significantly between different European countries, depending heavily upon their exposure to the EU’s sanctions against Russia. The countries most affected are in the Baltic states: inflation in Estonia hit 22% and in Lithuania printed at 20.5%.

Furthermore, today’s data is significantly higher than last month’s forecasts predicted – the European Commission estimated in July that annual average inflation would peak at 7.6% in the Euro area.

Nevertheless, a deeper fall in Euro exchange rates is averted by hawkish comments from European Central bank (ECB) officials. Executive board member Isabel Schnabel noted that inflation concerns raised before July’s interest rate hike had not been alleviated, pointing to possible further tightening action.

Subsequently, governing council member Martins Kazaks said the ECB would continue to raise interest rates in a bid to prevent inflation from becoming entrenched.

Pound (GBP) Resists Downside amid Bleak Economic Outlook

The Pound (GBP) is trading up against the majority of its peers, though gains are capped by downbeat comments from economic experts. Possibly uplifting the Pound are analysts’ judgement that fiscal concerns regarding the spending plans of PM hopeful Liz Truss are overplayed.

The UK’s fresh inflation figures, published yesterday, have cast doubts on the plausibility of tax cuts proposed by both Truss and her opponent Rishi Sunak in their leadership pledges. According to the Institute for Fiscal Studies, higher inflation will weaken public finances and make it harder to implement such measures.

Dominating headlines, however, are national rail strikes, which have left UK rail services at 20% functionality. Mick Lynch, general secretary of the Rail, Maritime and Transport union (RMT) warns that Britain could be brought by a standstill by strikes hitting every sector of the economy, adding that the rail dispute could go on indefinitely.

‘People are fed up with the way they’ve been treated,’ said Lynch; ‘People are getting poorer every day of the week. People can’t pay their bills. They’re getting treated despicably at the workplace.’

In a more general sense, economists forecast that cost-of-living pressures are going to get worse. A study by the University of York predicts that two-thirds of all UK households will be trapped in fuel poverty by January, including 86.4% of pensioner couples and 90.4% of lone parents with two or more children.

The news is likely to inspire further political volatility between both Tory leadership candidates and political parties.

While Rishi Sunak stated he’d been ‘very clear that my plan is to support [people at risk]’, shadow climate change and net zero secretary, Ed Miliband, criticised the Tories’ lack of support, saying today’s figures show ‘the full scale of the national emergency that could unfold unless the Conservative government acts.’

GBP/EUR Exchange Rate Forecast: UK Retail Sales to Drive Sterling Movement?

Looking ahead, tomorrow’s retail data from the UK could influence the Pound Euro exchange rate. If sales fell by more than last month, GBP may fall against its peers - potentially triggering a downturn in the GBP/EUR exchange rate.

Meanwhile, Germany’s PPI could dampen Euro sentiment if it remains unchanged from June’s 0.6%. On the other hand, German data has been a poor barometer of Eurozone performance recently, as the country’s economy stalled in Q2 while GDP in the bloc as a whole printed at 0.6%.

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