August 24, 2022 – Written by John Cameron
GBP/EUR Exchange Rate Rises and Falls on UK Energy Concerns
The pound-euro exchange rate (GBP/EUR) initially rose this morning as bets on a 50 basis point interest rate hike from the Bank of England (BoE) supported the pound (GBP) .
At the time of writing, GBP/EUR is trading at €1.1868, virtually unchanged from today’s opening levels.
British Pound (GBP) Falls Amid Bearish Energy Price Projections
Early gains in the pound’s exchange rate were largely reversed this morning as hopes of an imminent half-point BoE interest rate hike failed to offset concerns over rising energy prices and the effect they will have on the UK economy.
UK government yields extended their ascent, hitting a two-month high as markets eye the possibility of an interest rate hike to 4% in 2023. In a bid to tame inflation, traders in the city speculate that the BoE’s key rate could even reach 4.1% in June next year.
This would be good news for traders, whose return on investment would increase – but the additional cost such an increase would place on bills and basic necessities would put more British families at risk of poverty.
Moreover, it would aggravate the repercussions of public borrowing. Torsten Bell, chief executive of the Resolution Foundation, observes that the cost of helping UK households and businesses with energy prices is already set to trigger the third significant rise in national debt in 15 years.
“This third big public debt buyout will not be like the previous two,” he says; “After the financial crisis and during the pandemic, we got used to more debt but lower interest charges on debt. This time the two will go up together.
As for how much the government will have to borrow, energy giant Scottish Power has proposed a bailout that would cap energy prices for UK households at £2,000. This deal would cost ministers around £100bn.
The offer matches a new paper from the Institute for Government, which predicts that offsetting energy bill increases of £900 this autumn could cost the government an additional £23bn this year on top of its £33bn budget allocation. billion £. Next year it would cost ministers around £90billion to extend the same level of support.
Euro (EUR) subdued due to lack of data
The Euro (EUR) is trending lower against the majority of its peers this morning as the lack of meaningful economic data from the bloc leaves the currency trading on external factors.
Rising energy costs weigh heavily on the euro: gas and electricity prices hit record highs in parts of the eurozone yesterday as Russian utility Gazprom announced it would suspend exports via the Nord Steam pipeline for unscheduled maintenance work.
Energy costs across the bloc doubled on receipt of the news, with the price of natural gas reaching fourteen times the average for the past decade.
Yesterday’s PMI data also continues to dampen support for the single currency. Weakening factory activity appears to be causing the Eurozone economy to shrink, as Andrew Harker, chief economics officer at S&P Global market Intelligence, observed:
“The latest PMI data for the eurozone points to a contracting economy in the third quarter of the year…the recovery in the services sector after the lifting of pandemic restrictions has faded, while manufacturing remained mired in contraction in August.”
Expectations of an increase in US durable goods orders are also weighing on euro demand today. While the anticipated rise is modest from last month, a stronger-than-expected reading could support the US Dollar (USD) by bolstering hawkish expectations for the Federal Reserve.
A stronger dollar would likely put further pressure on euro exchange rates, given the strong negative correlation between the two currencies.
GBP/USD exchange rate forecast: Sterling Dynamics to drive the move?
Looking ahead, a quiet record leaves GBP/EUR exposed to external factors such as risk sentiment and politicians’ and media forecasts. If UK government borrowing remains in focus, the pound could weaken further, which could lead to a prolonged decline in the pound’s exchange rate.
Elsewhere, further measures taken by Germany to conserve energy and thereby reduce spending could boost euro sentiment, putting further pressure on GBP/EUR. German Economy Minister Robert Habeck announced this morning that the proposed measures could reduce gas consumption by 2-2.5%.
TAGS: Euro Pound Forecast