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Pound Euro Exchange Rate News: GBP/EUR Climbs Modestly Despite UK Political Volatility and Improving Risk-Sentiment

July 18, 2022 - Written by John Cameron

Pound (GBP) Climbs Despite Continuing Political Volatility

The Pound (GBP) is finding modest support today despite the continued infighting of the Conservative party, highlighting the deep divisions in the Tory party.

With contrasting and conflicting plans across the board, investors remain cautious as to who would be the one to lead the UK out of economic strife come September. The race for the Tory and the UK leadership continues to heat up after the second televised debate saw a bad-tempered exchange that exposed just how divisive the Tory party has become.

Contrasting tax cut plans and barbed comments dominated the debate, with the only agreement they shared was that Boris Johnson would not be offered a position in their cabinets. With experts concerned that drastic tax cuts could push inflationary pressures further, and potentially trigger a recession.

With such varying and potentially damaging tax cut plans between the candidates, the ongoing political uncertainty with the leadership debate could leave Sterling open to strong headwinds.

Meanwhile, markets have started to speculate the BoE will start delivering 0.5% increases from August, more in line with the aggressive Federal Reserve. With the economic outlook so dire, the BoE are struggling to walk the fine line between reining in inflation and triggering a recession.

The Bank of England (BoE) member of the Monetary Policy Committee (MPC) Michael Saunders is due to make a speech today. If he continues with hawkish comments of a 50ps hike at the next policy meeting, it could provide a modest tailwind for the Pound.

Foreign Secretary, and leadership candidate Liz Truss, has called out the BoE on its failure to restrain the fastest inflation rate in over forty years. Truss has hinted at changing the central bank’s mandate if she wins power, and that the current model is failing the UK. Truss said during the debate:

‘We need to look at the best practice around the world. The countries who have been most successful at controlling inflation.

‘We need to look at the mandates they have, for example the Bank of Japan. The last time the mandate was set was in 1997, in completely different times.’

The Euro (EUR) Wavers Despite Improving Market Sentiment

The Euro (EUR) saw an initial uptick this morning amid an improving market sentiment. With better-than-expected trade figures for Europe also lending support, an improving market mood was seen after hawkish comments from the People’s Bank of China’s (PBoC) pledge to step up monetary policy support to the Chinese economy. PBoC Governor Yi made comments before a meeting of G20 finance leaders in Indonesia. Comments in the state-owned newspaper Securities Times said:

‘Looking out to the second half of the year, the foundation of our economic rebound is still not solid and economic operations still face many uncertain and unstable factors.

‘In terms of coping with new challenges and changes that may exceed expectations, monetary policy has sufficient space and ample tools.’

However, political volatility of the Euro area variety continues to brew in Italy as early elections are underway to replace the recently resigned Mario Draghi. On top of Ukraine conflict issues, and concerns of fragmentation, economists at MUFG Bank claim this week to be significant to the Euro zone, and the Euro:

‘The developments have increased the risk of an early election in Italy. A further increase in political uncertainty would result in tighter financial conditions and disrupt efforts to pass the budget and economic reforms needed to access EU Recovery Funds.’

GBP/EUR Exchange Rate Forecast: Busy Week for Key UK Data to Weigh on the Pound?

Looking ahead, the Pound Euro exchange rate will be left open to market sentiment as data remains thin on the ground. Looking ahead to the week and Sterling could come under increased pressure as unemployment data is released tomorrow before inflation readings on Wednesday.

Meanwhile, a speech from BoE MPC member Michael Saunders today could see a boost for Sterling if talks of a 50bps hike materialise.

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