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Pound Euro (GBP/EUR) Exchange Rate Rockets Following German Election

September 27, 2021 - Written by John Cameron


GBP/EUR Exchange Rate Firms on Election Results

The Pound Euro (GBP/EUR) exchange rate has risen today despite significant GBP headwinds as a result of fuel worries and ongoing supply chain issues.

Euro trading sentiment is dented by yesterday’s German election results, which leave the country with a fragmented parliament. Germany’s centre-left candidate Olaf Scholz won the election by a narrow margin against the centre-right Christian Democratic Union (CDU) party.

At the time of writing, GBP/EUR is trading at €1.1714, 0.4% up on today’s opening levels.

Euro (EUR) Election Downside Exacerbated by Lagarde Comments

The Euro (EUR) has fallen against the majority of its peers today as uncertainty over the German election result subdues investors’ support for the currency.

Any possible coalition must be pro-European, as the extreme-right Alternative for Deutschland (AfD) is banned by other parties; however, there is more than one possible outcome, making it difficult for businesses to predict trading conditions.

The most likely outcome is a coalition between Scholz’s Social Democratic Party (SPD), the Greens and the Free Democratic Party (FDP); although a CDU, Greens and FDP coalition is also possible.

Causing particular friction is the prospect of a drawn out reorganisation process. The outgoing chancellor Angela Merkel is going nowhere until the coalition is formed, which could take until Christmas.

A dovish speech from European Central Bank (ECB) President Christine Lagarde this afternoon has exacerbated Euro downside, as Lagarde states she has every reason to believe that base effects and energy inflation will not result in lasting overall inflation.

The ECB President stuck to the ECB's official view that inflation will ease back below 2% next year, stating:

‘We have every reason to believe that [rebounding energy prices and supply bottlenecks] are not going to be lasting factors and [will] be reduced in the course of 2022.’

Pound Resists Headwinds Despite Fuel Concerns, Supply Chain Issues

The Pound (GBP) is climbing this morning against the majority of its peers despite growing fuel and supply chain concerns.

Despite last week’s assurances from the government and motoring body AA, who stated that ‘there is no shortage of fuel and thousands of forecourts are operating normally’, forecourt operators are now reporting unprecedented demand.

Yasser Ahmed, 37, who runs West Drayton service station with his father, said he had ‘not had time to breathe’ as people clamoured to fill up their tanks.

Edwin Atema, head of research and enforcement at the Federation of Dutch Trade Unions, which represents drivers across the EU and Europe, also rejected the UK’s short-term via allowance for foreign drivers to return to work in Britain until Christmas:

‘The EU workers we speak to will not go to the UK for a short-term visa to help the UK out of the [mess] they created themselves.’

In spite of these headwinds, the Pound has found support on hawkishness from the Bank of England (BoE) and a risk-on market mood.

BoE tailwinds persisted in the wake of last week’s interest rate announcement from the central bank. Two members of the Monetary Policy Committee (MPC) have voted to cut short debt purchases already, as the bank’s representatives hinted that interest rates could rise even before the BoE completes its bond-buying scheme.

GBP/EUR Exchange Rate Forecast: Central Bank Speeches to Direct Movement?

Looking ahead, speeches tomorrow from European Central Bank (ECB) President Christine Lagarde and BoE Governor Andrew Bailey may direct trading sentiment. Further speeches on Wednesday could extend losses or gains based on the speakers’ tone.

BoE consumer credit on Wednesday could potentially buoy the Pound, while German inflation data on Thursday is likely to be the main driver of movement.

If inflation rises to 4.2% as expected – 2.2% above the ECB’s target of ‘close to, but below 2%’ – the ECB may be driven to hawkish measures.

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