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Pound Euro Exchange Rate News: GBP/EUR Recovers Lost Ground Despite Disappointing UK Data

May 12, 2022 - Written by John Cameron

The Euro (EUR) Stutters as Fears Continue to Grow around Protracted Ukraine Conflict

The Euro (EUR) is faltering against the Pound as the resurgence of geopolitical risk-aversion weighs heavily. With Finland now set to join NATO, much to the chagrin of the Kremlin, the ongoing crisis in Ukraine shows no signs of abating.

Russia has previously stated that Finland’s move to join NATO was a threat to Russia. The country’s foreign ministry said in a statement:

“Finland joining NATO is a radical change in the country’s foreign policy. Russia will be forced to take retaliatory steps, both of a military-technical and other nature, in order to stop threats to its national security arising.”

Brexit concerns also make an unwelcome appearance as a potential trade war could further hamper both the single currency and Sterling. With UK Foreign Secretary Liz Truss warning that she was prepared to negate the agreement of the Northern Ireland Protocol, the EU responded that it was prepared to suspend trade deals with the UK unless an agreement can be reached.

Pound (GBP) Firms Despite Poor Economic Data

The Pound (GBP) is recovering modestly against the Euro despite the latest UK GDP figures printing below market forecasts. Growth in the first quarter of 2022 missed projections of a 1% expansion and slowed to 0.8%, according to the Office for National Statistics (ONS), down from 1.3% at the end of 2021. The accompanying month-to-month data reported a surprising 0.1% contraction in the month of March, this comes after growth stalled in February.

With the economic horizon only growing darker, fears of a recession loom, and combined with the Bank of England’s (BoE) continued dovish outlook, economists at Commerzbank report that the BoE will have to tighten its monetary policy further, potentially hampering Sterling:

“The BoE is continuing its gradual tightening of monetary policy. However, it is likely to act less restrictively than expected by the market. The pound should suffer increasingly from this. Another burdening factor is that the European Central Bank (ECB) is also likely to initiate its monetary policy turnaround in July. We, therefore, expect (GBP/EUR) to trade (lower) in the course of the year.”

GBP/EUR Exchange Rate Forecast: Ukraine Situation to Further Soften Euro?

Despite the Russia Ukraine conflict affecting both Pound and Euro, any further negative news is likely to disproportionately impact the single currency. And with Finland’s official application to join NATO to take place in the next few days, and with no end in sight for the conflict, the Euro could slide further against the Pound.

Providing a possible headwind to sterling is a potential trade war on the back of comments made by Truss and the Northern Ireland Protocol, which will weigh heavily on both the Euro and the Pound, unless the two sides can reach an agreement.

With no further major data this week, all eyes will be on the unfolding situation in Ukraine and how Russia responds to Finland joining NATO.
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