Pound Euro Exchange Rate News: GBP/EUR Subdued as Sunak Reveals Cost-of-Living Support

May 26, 2022 - Written by John Cameron

STORY LINK Pound Euro Exchange Rate News: GBP/EUR Subdued as Sunak Reveals Cost-of-Living Support

Pound (GBP) Slips as Cost-of-Living Plans are Announced

The Pound (GBP) saw a muted response as Chancellor Rishi Sunak unveiled measures to support the cost-of-living crisis gripping the UK.

Sunak’s intervention comes as the UK faces its highest rate of inflation for over 40 years. Which alongside the ongoing Ukraine crisis, and Covid lockdowns in China, have stoked UK recession fears in recent weeks.

The ‘temporary targeted energy profits levy’, a rebranding of the windfall tax, is aimed at taxing the extraordinary profits of energy companies. The levy should raise about £5billion of revenue to fund the support package.

Sunak said the measures will be temporary, and that pragmatism is needed, and will only be lifted when prices come back down:

Sunak said: “The new levy will be charged on profits of oil and gas companies at a rate of 25%. It will be temporary and when oil and gas prices return to historically more normal levels the levy will be phased out.”

The proposed £15billion support package will target those most in need. In a statement by the Treasury, it is confirmed that almost all the eight million most vulnerable households across the UK will be provided with support of up to £1200 this year, including a one-off £650 cost-of-living payment.

The Pound initially rose ahead of the announcement on hopes the support could provide a reprieve for the UK amidst the soaring inflationary pressures.

However, despite the support package appearing to exceed expectations this optimism quickly faded, leaving Sterling to relinquish most of its gains.

Euro (EUR) Gains Ground amid Hawkish ECB

The Euro (EUR) is gaining ground on the Pound today as EUR investors grow increasingly confident the European Central Bank (ECB) will pursue a series of interest rate hikes this year. Governing Council Member Klaas Knot yesterday suggested that inflation expectations are on course for a 50bps rate hike in July.

Capping any further gains for the Euro is the ongoing Ukraine invasion, and the proposed ban on Russian oil imports which could see energy prices further.

Ahead of the EU leaders’ summit in Brussels, the European Commission President Ursula von der Leyen is pushing for an outright ban on Russian imports of oil. But Hungary’s reluctance could still threaten the deal and provide a major boost for Putin and his reliance on fossil fuel exports to finance his invasion of Ukraine.

Elsewhere, the Euro could see demand further sapped with mounting Brexit tensions. If the UK government goes ahead with their proposed ‘tearing up’ of the Northern Ireland protocol, a trade war could be on the cards.

GBP/EUR Exchange Rate Forecast: Lack of Data Leaves Door Open to Political Tailwinds?

Looking ahead, without any major data to go on, the Pound Euro (GBP/EUR) exchange rate could encounter more pressure and increased movement with the political fallout from today’s announcement. With markets reacting to the support package, a tailwind could be in store for the Pound, as any relief for the UK economy would be a boost for sterling.

Elsewhere, ECB Chief Economist Philip Lane is due to speak tomorrow, any further comments confirming the central bank’s proposed rate hikes and their continuous hawkish stance could bolster the Euro against its rivals

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TAGS: Pound Euro Forecasts