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Pound Euro Exchange Rate News: GBP/EUR Stumbles amid Political and Economic Uncertainty

June 1, 2022 - Written by John Cameron

Pound (GBP) Muted amid Political and Economic Woes

The Pound (GBP) is softening against the Euro today as political headwinds continue to dampen investor’s spirits.

Calls for Boris Johnson’s resignation grow in number by the day, with the resulting political uncertainty sapping demand for the Pound. To make matters worse, Brexit fears don’t appear to be fading, with the Northern Ireland protocol still in the spotlight.

UK minister Conor Burns has been in Washington to present the UK’s case to the US where he claims the Northern Ireland protocol threatens the Good Friday Agreement. With tensions continuing, and the US vehemently against unilaterally altering the agreement, House Speaker Nancy Pelosi warned that any change to the agreement could result in a breakdown of free trade between the US and the UK.

At risk of an all-out trade war, with the US now involved, is something nobody wants. However, Burns is adamant that the UK’s stance remains firm:

‘This is too important for us – sorting out the situation in Northern Ireland, doing the right thing for the UK and for the people in Northern Ireland – to be interwoven with any foreign policy or trade ambition.’

With the economic landscape darkening, concerns about growth are key to the Pound’s performance. In the year to date, Sterling is the third worse-performing G10 currency. Economists at Rabobank expect headwinds to continue over the coming months:

‘The current cost of living crisis in the UK is consistent with even greater concerns about demand erosion which is likely to weigh on UK investment further. This in turn appears to be creating headwinds for the pound.

‘For GBP to rise above the weight of negative sentiment, optimism about the UK growth outlook will have to improve.’

The Euro (EUR) Recovers Modestly amid Mixed Data

The Euro (EUR) is firming against its peers today in the face of mixed data. German retail sales plummeted 5.4% month-on-month in April, the biggest fall of the year and far worse than market expectations of a 0.2% decline.

Fortunately the Euro was able to firm on the back of positive unemployment data. The Eurozone’s jobless rate remained unchanged at a record low of 6.8% for the month of April, in line with expectations. Compared to April last year, unemployment figures decreased by just over 2.5million.

Ahead of the 100th day of the Ukraine war, the Euro continued to face headwinds amidst concerns over European energy security. Stoked by yesterday’s announcement that EU leaders had agreed on a partial ban on Russian oil, and Gazprom’s consequent cutting of supplies to the Netherlands.

Any negative news to come out of the Russia Ukraine conflict is likely to weigh on the Euro.

Potentially limiting the Euro’s upside potential is the suggestion the European Central Bank (ECB) will take a more cautious approach in tackling inflation. Economists at Commerzbank expect gradual rate hikes still the central bank’s choice of action:

‘For the Euro to find additional support there would have to be increasing signs that the ECB is hiking rates more quickly and that it might even be considering 50bp steps. However, there are no signs of that happening as yet.'

‘I can imagine the euro to slowly be taking a wait-and-see approach.’

GBP/EUR Exchange Rate Forecast: Turbulent Economic and Political Conflict to Weigh Further?

Looking ahead, EUR investors may look to a speech by ECB President Christine Lagarde for fresh impetus. If she remains broadly hawkish she may help the Euro to extend its gains.

The Euro could also be influenced by Germany’s upcoming trade figures. A narrowing of the country’s trade surplus in April may reflect negatively on the single currency later in the week.

Meanwhile, the Pound will be left open to market movements around the ongoing political and economic turmoil with further negativity likely to weigh on the Pound.

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