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Pound Euro Exchange Rate News: GBP/EUR Slips amid UK Political Anxiety

June 8, 2022 - Written by John Cameron

GBP/EUR Stumbles amid UK Political Uncertainty

The Pound Euro (GBP/EUR) exchange rate is trading lower today as UK political anxiety continues. Meanwhile, the Euro (EUR) is gaining ground ahead of the European Central Bank’s (ECB) interest rate decision tomorrow.

At the time of writing, the GBP/EUR exchange rate is trading at approximately €1.17, down roughly 0.3% from today’s opening levels.

Pound (GBP) Slips as UK PM Remains in Firing Line

The Pound (GBP) is facing headwinds against the Euro today amidst the ongoing fallout from Prime Minister Boris Johnson’s narrow victory in Monday’s no confidence vote.

Johnson won the vote with 211 votes to 148, with 41% of Conservative MP’s confirming that they have no confidence in his leadership.

As a result, GBP investors are concerned that the Conservative Government is divided, with Johnson under pressure to reshuffle his cabinet and to revaluate the current tax rate.

Although Johnson’s premiership should be safe for another year, rebel Tory MPs are reportedly looking to make alterations to the current 1922 committee rules. The same MPs are also allegedly planning ‘vote strikes’ to further highlight their discontent with the result.

Moreover, renewed Brexit jitters are weighing on GBP exchange rates.

The publication of the Northern Ireland protocol’s amendments has been delayed. However, GBP investors are concerned that unilateral amendments may not only widen the Conservative divide but may also harm the UK-EU relationship and trigger a trade war.

In his letter of no confidence to Johnson earlier in the week, Former Treasury Minister and Conservative MP Jesse Norman warned unilateral action could be ‘economically very damaging, politically foolhardy and almost certainly illegal’.

In response, demand for Sterling remains weak.

Euro (EUR) Climbs Ahead of ECB Interest Rate Decision

The Euro is trading higher against the Pound today as EUR investors await the European Central Bank’s (ECB) latest interest rate decision on Thursday.

The ECB is expected to leave interest rates unchanged again this month. However, EUR investors anticipate the bank will deliver some hawkish forward guidance.

The bank is predicted to confirm plans to hike interest rates at its July policy meeting, as well as begin the process of bringing bond purchases to an end. The main question is whether the bank might pursue a 50 basis points hike.

This comes as inflation across the Eurozone soared to 8.1% in April: this is significantly higher than the bank’s target of 2%.

Mark Wall, a chief economist with Deutsche Bank, commented:

‘A handful of Governing Council members are already open to a 50bp hike.

‘We believe the ECB is continuing to underestimate inflation and we expect support for a 50bp hike will increase as the summer progresses.’

If the bank signals that a 50bps hike next month is a possibility, the Euro may gain further traction.

The Euro is also receiving support this morning as the Eurozone’s economy expanded at a faster rate than expected, during the first three months of 2022. The bloc’s latest GDP estimate was revised up from 0.3% to 0.6%.

On the other hand, the Euro’s gains are being capped by Germany’s latest industrial production figures.

In April, production increased to 0.7%. Although this is above March’s 3.7% contraction, it falls short of expectations of a 1% expansion.

The largest contributor was capital goods, intermediate goods, and energy, whilst consumer goods declined, largely driven by the Ukraine crisis and supply chain bottlenecks.

GBP/EUR Exchange Rate Forecast: Will a Hawkish ECB Buoy EUR?

Looking ahead, the Pound Euro exchange rate will almost certainly be driven by the ECB’s latest interest rate decision.

If the bank delivers some hawkish forward guidance, it is likely to bolster demand for the single currency.

As for the Pound, it is likely to remain exposed to the UK political uncertainty.

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