Pound Euro (GBP/EUR) Exchange Rate Rises as Single Currency Succumbs to Pressure

August 23, 2022 - Written by John Cameron

STORY LINK Pound Euro (GBP/EUR) Exchange Rate Rises as Single Currency Succumbs to Pressure

GBP/EUR Exchange Rate Inches Higher as Euro Sentiment Weakens

The Pound Euro (GBP/EUR) exchange rate is ticking up today, fuelled by weakness in the Euro (EUR) as opposed to Pound (GBP) strength. Both currencies are facing headwinds this afternoon as PMI data prints mixed and energy fears affect the UK and the Eurozone economies.

At the time of writing, GBP/EUR is trading at €1.1861, up 0.2% from today’s opening levels.

Euro (EUR) Trades around 20-Year Lows as Energy Concerns Mount

The Euro has already hit a 20-year low against the US Dollar (USD) today and continues to trade down against its other peers as energy supply worries weigh upon the single currency alongside recession fears and PMI headwinds.

Dominating headlines at the moment is the European energy crisis, as dwindling supplies from Russia cause the demand-supply ratio to spike. In more than one country across the bloc, day-ahead energy prices have hit record highs, with Germany charging €600 per MWh.


Bloomberg columnist Javier Blas remarks that before 2020, anything above €75-€100 per MWh was considered expensive. Now, benchmark gas prices in the European Union have doubled in a single month, to be 14 times higher than the average price of the past decade.

One company affected by gas prices is Polish chemicals group Grupa Azoty. The company details its experience of ‘demand destruction’ – a set of circumstances wherein it isn’t economical for a factory to operate.

The group says: ‘The current situation in the natural gas market, which determines the profitability of production, is exceptional, completely independent of the company and impossible to foresee.’

Elsewhere in the bloc, August’s flash PMI data revealed that private sector output continued to slide for both Germany and the Eurozone.

Germany’s services PMI marked the biggest decline in activity since February 2021, with similar results in the wider Euro area as the latter PMI showed a fourth consecutive month of slowdown.

Commenting on the data, Andrew Harker of S&P Global Market Intelligence said:

‘Cost of living pressures mean that the recovery in the service sector following the lifting of pandemic restrictions has ebbed away, while manufacturing remained mired in contraction in August.’

Pound (GBP) Weakens as UK Economy Close to Stagnation

While trading broadly lower in the European morning, the Pound moved off two-and-a-half year lows against the US Dollar today as August’s services PMI exceeded expectations. Gains were capped, however, as the UK’s manufacturing PMI slumped unexpectedly into contraction territory.

Data from S&P Global/CIPS revealed that services activity in Britain ticked down to 52.5 in August from 52.6 in July - much better than market expectations of 52 although still a slowdown. The rate of job creation was strong, while service providers reported higher salaries and companies showed increased confidence compared with July.

On the other hand, manufacturing activity was hampered by reduced customer demand amid the UK’s cost-of-living crisis, with rising interest rates and high inflation weighing upon spending power. Also denting output were labour shortages and reduced confidence in the sector.

Compounding GBP headwinds was a report from the Confederation of British Industry, which revealed that factory output in Britain slumped over the past three months, for the first time since February 2021.

Firms reported a drop in new business, reflecting the message of UK manufacturers. CBI economist Alpesh Paleja remarked:

‘With expectations for future growth subdued, steps will need to be taken to shore-up confidence in the short to medium term – particularly supporting vulnerable firms and consumers with energy price rises.’

As in the Eurozone, energy price hikes in the UK have knocked the Pound lower against its peers recently, as analysts warn of trouble ahead unless the government intervenes.

Economists at JPMorgan Private Bank predict that Sterling could drop as low as $1.14 – a level touched earlier in the Covid-19 pandemic which at the time represented at thirty-five year low.

GBP/EUR Exchange Rate Forecast: External Factors to Drive Trading?

Looking ahead, both the UK and the Eurozone lack significant economic stimulus tomorrow, leaving the Pound Euro exchange rate to trade on external factors.

Energy concerns are likely to cap gains for both currencies, although news of financial support from the UK government would likely inspire GBP tailwinds. However, the majority of PM frontrunner Liz Truss’s policies have stoked division among markets thus far.

Elsewhere, markets may find optimism in bullish hopes for Friday’s announcement at the Jackson Hole Symposium in America. If Federal Reserve Chairman Jerome Powell downplays concerns of a global recession, risk appetite may improve, buoying both the Pound and the single currency.

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TAGS: Pound Euro Forecasts