Pound Euro Exchange Rate News: GBP/EUR Fluctuates amid Enduring UK Political Uncertainty as the Search for Boris Johnson’s Successor Continues

July 11, 2022 - Written by John Cameron

STORY LINK Pound Euro Exchange Rate News: GBP/EUR Fluctuates amid Enduring UK Political Uncertainty as the Search for Boris Johnson’s Successor Continues

Pound (GBP) Wavers Amid Ongoing Political Turmoil

The Pound (GBP) is trading sideways against the Euro (EUR) today amid the looming political instability. Since Boris Johnson’s resignation, a host of Conservative MPs have thrown their hat into the leadership ring. But with a growing number of candidates, and their respective competing tax plans, political stability could still be some time away.

As the UK, and investors, await a new government less distracted by scandals and more focused on the economic prosperity, Sterling could come under increased pressure. Economists at Rabobank warn of the potential volatility:

‘For GBP a crucial element of the policies of the new PM will be how they can underpin the growth outlook.

However, this is a complex ask. Although many of the candidates are promising to lower taxation in the UK, in line with traditional Tory values, this could clearly raise inflation further if not handled properly.

(The Pound) may suffer a lack of fresh direction until the new PM is in place.’

The Conservative Party’s 1922 Committee is scheduled to elect a new executive today, which would begin the process of selecting a new party leader to replace Johnson. However, as of this morning, 11 Conservative MPs have announced their candidacy, with a plan to announce the winner in September.

Elsewhere, the Bank of England is likely to shift its monetary policy to a more gradual approach in raising interest rates. As the central bank continues its battle to fight inflation without triggering a recession, a tricky balancing act, is likely to concern investors and potentially sap demand.

Further providing potential headwinds to the Pound is the persisting Brexit issues with the controversial Northern Ireland protocol bill, due to be passed in parliament in the near future. With the EU warning legal action if the UK goes through with the motion, a potential trade war could be ignited between the two.

The Euro (EUR) Undermined by Multiple Relentless Headwinds

The Euro is under further pressure today as a multitude of headwinds continue to weigh heavily. Growing fears of a likely recession, combined with its negative correlation to the strong US Dollar and fragmentation worries, the outlook for Euro is not good.

With the gas security fears mounting as the Ukraine crisis rolls on, renewed threats from Russia of cutting off supplies is a very real threat. With the Nord Stream 1 gas pipeline annual maintenance underway, there are concerns that the reopening will not occur as planned. Economists at MUFG Bank explains the dire situation:

‘The main driver for Euro weakness continues to be building concerns over greater disruption for European economies from tightening energy supplies.

‘The worsening supply situation is already encouraging energy rationing.

‘The sharp deterioration in Germany’s trade balance has also attracted more market attention last week. It was reported that Germany recorded its first trade deficit in May since 1991. It has mainly been driven by the sharp rise in import (energy) prices.’

GBP/EUR Exchange Rate Forecast: Bleak Economic Outlook to Dampen the Pound?

Looking ahead, with data thin on the ground for the rest of the day, the Pound Euro exchange rate will be left open to an increasingly souring market sentiment.

All eyes will instead be focused on the UK GDP data released on Wednesday. An expected stall in economic growth is likely to weigh on the Pound amid fears of a looming recession.

Meanwhile, the Bank of England (BoE) Governor Andrew Bailey is to appear before a parliamentary committee today. Alongside several Financial Policy Committee members, Bailey will be discussing the latest Financial Stability Report, and the bleak economic outlook.

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