Pound Euro (GBP/EUR) Exchange Rate Fluctuates on Mixed GBP Stimulus

August 24, 2022 - Written by John Cameron

STORY LINK Pound Euro (GBP/EUR) Exchange Rate Fluctuates on Mixed GBP Stimulus

GBP/EUR Exchange Rate Climbs, Drops on UK Energy Concerns

The Pound Euro (GBP/EUR) exchange rate rose initially this morning as bets for a 50bps interest rate hike from the Bank of England (BoE) supported the Pound (GBP) – subsequently, however, energy price headwinds sapped Sterling support.

At the time of writing, GBP/EUR is trading at €1.1868, virtually unchanged from today’s opening levels.

Pound (GBP) Sinks Lower amid Downbeat Energy Price Projections

Early gains in Pound exchange rates have been largely reversed this morning, as hopes of an imminent half-point interest rate hike from the BoE fail to offset worries over rising energy prices and the effect they will have on Britain’s economy.

UK government yields extended their climb, hitting a two-month high as markets consider the possibility of interest rates rising to 4% in 2023. In a bid to bring inflation under control, city traders speculate that the BoE’s key rate may even hit 4.1% in June next year.


This would be good news for traders, whose return on investment would increase – but the added cost such an increase would represent across bills and household essentials would put more UK families at risk of poverty.

Furthermore, it would escalate the repercussions of government borrowing. Torsten Bell, chief executive of the Resolution Foundation, observes that the cost of helping UK households and businesses with energy prices is already set to trigger the third significant increase in national debt in 15 years.

‘This third major rachet of public debt won’t be like the last two,’ he says; ‘after the financial crisis and in the pandemic, we got used to debt rising but debt interest costs falling. This time, both will be heading up together.’

Regarding the amount the government will need to borrow, major energy firm Scottish Power has proposed a rescue package that would cap energy prices for UK households at £2,000. This deal would cost ministers in the region of £100bn.

The offer tallies with a new paper by the Institute for Government, which predicts that offsetting energy bill increases on £900 this autumn could cost government an additional £23bn this year on top of its budgeted allowance of £33bn. Into next year, it would cost ministers around £90bn to extend the same level of support.

Euro (EUR) Subdued on Lack of Data

The Euro (EUR) is trending lower against the majority of its peers this morning, as a lack of significant economic data from the bloc leaves the currency to trade on external factors.

Weighing heavily upon EUR sentiment are rising energy costs: gas and electricity prices rocketed to record highs in parts of the Eurozone yesterday as Russian supplier Gazprom announced it would be suspending exports via the Nord Steam pipeline for unscheduled maintenance work.

Energy costs across the bloc doubled in receipt of the news, with the price of natural gas rising to fourteen times the average of the last decade.

Yesterday’s PMI data also continues to dampen support for the single currency. Weakening factory activity appears to be causing the Eurozone economy to shrink, as Andrew Harker, Economics Director at S&P Global market Intelligence observed:

‘The latest PMI data for the eurozone points to an economy in contraction during the third quarter of the year… recovery in the service sector following the lifting of pandemic restrictions has ebbed away, while manufacturing remained mired in contraction in August.’

Also dragging on EUR demand today are expectations for an increase in US durable goods orders. While the anticipated rise is modest compared with last month, a stronger-than-expected reading could buoy the US Dollar (USD) by reinforcing hawkish expectations for the Federal Reserve.

A stronger USD would likely heap additional pressure upon Euro exchange rates, given the strong negative correlation between the two currencies.

GBP/USD Exchange Rate Forecast: Sterling Dynamics to Drive Movement?

Looking ahead, a quiet docket leaves GBP/EUR exposed to external factors such as risk sentiment and forecasts from politicians and the media. If UK government borrowing remains in focus, GBP may weaken further, potentially leading to an extended downside in the Pound Euro exchange rate.

Elsewhere, new measures from Germany to save energy and thus cut back on spending may boost EUR sentiment, further pressuring GBP/EUR. Germany’s Economic Minister Robert Habeck announced this morning that proposed measured could reduce gas usage by 2-2.5%.

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TAGS: Pound Euro Forecasts