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Pound Euro Exchange Rate News: GBP/EUR Wavers as UK Inflation Hits Fresh 40-Year High

July 20, 2022 - Written by John Cameron

Pound (GBP) Wavers Modestly amid Higher-than-Expected Inflation

The Pound (GBP) initially strengthened today before slipping back down as inflation rose to its highest level since 1982. CPI for June printed at 9.4%, exceeding expectations of 9.3%. Soaring living costs, led by fuel and food, have seen inflation rise for the ninth consecutive month.

Despite expectations continuing to grow of the Bank of England (BoE) to raise interest rates by a bolder 50bps, concerns that the BoE will not act quick enough are troubling investors. Victoria Scholar, Head of Investment at Interactive Investor comments on how the latest CPI figures could dictate future rate hikes:

‘It was only last July that inflation was comfortably sitting at the Bank of England’s 2% target. The sharp ascent over the last 12 months has seen inflation come close to double digits with the expectation that price levels will push higher still before coming back down.

It looks like the central bank could carry out a 50-basis point hike at its next meeting in August, which would be the largest increase since 1995.’

However, several headwinds are weighing on the Pound today. Political uncertainty looks set to remain, as the final two candidates for the Conservative and UK leadership race nears the final stretch. Rishi Sunak is leading the pack, with Liz Truss and Penny Mordaunt following closely.

With their varying and conflicting fiscal policies, experts are becoming concerned as to how the new Prime Minister plans to lead the UK out of the myriad of economic woes it finds itself in.

Meanwhile, the ‘summer of discontent’ continues, as the Royal Mail threatens to split up business as it reports daily losses of £1m. This comes just after a day of what could well be the biggest industrial action of the summer. Around 115,000 members of the Communication Workers Union (CWU) voted on strikes, in relation to pay disputes. Ongoing social unrest and industrial disruptions could weigh heavily on the Pound.

Euro (EUR) Under Pressure as Fears of Full Cut-Off of Russian Gas Grow

The Euro (EUR) is wavering today as news from the European Commission President Ursula von der Leyen warned Europe that Russia could completely cut off gas supplies to Europe.

With the relatively positive news of the reopening, albeit at reduced levels, of the Nord Stream 1 pipeline after scheduled maintenance, gas security fears loom once again. Von der Leyen said:

‘Russia is blackmailing us. Russia is using energy as a weapon. And therefore, in any event, whether it's a partial, major cut-off of Russian gas or a total cut-off of Russian gas, Europe needs to be ready.

A gas crisis in the single market, our economic powerhouse, will affect every single member state in our European Union.’

Since the Ukraine crisis, Europe has been scrambling to source alternate gas supplies away from Russia. But the Kremlin has warned it could not only reduce its supply but completely cut off vital gas to Europe in the winter.

Lending modest support to the Euro is news that Italian prime minister Mario Draghi has stepped back from resigning, reversing a potential political crisis amid the ever-worsening economic situation in the Eurozone.

GBP/EUR Exchange Rate Forecast: Economic Turmoil to Weigh on the Pound?

Looking ahead, the Pound Euro exchange rate will be left open to market sentiment as data remains thin until the end of the week. Investors will be keeping a close eye on the developments with the Nord Stream 1 pipeline, and if Russia is willing to cut supplies off to Europe.

Meanwhile, as markets continue to digest soaring inflation in the UK, investors will be focused on how the BoE intends to combat the cost-of-living crisis.

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