Pound Euro Exchange Rate News: GBP/EUR Softened amid Worsening Cost-of-Living Crisis in the UK

Modified: Tuesday, 30 August 2022 12:35 BST - Written by John Cameron

STORY LINK Pound Euro Exchange Rate News: GBP/EUR Softened amid Worsening Cost-of-Living Crisis in the UK

Pound (GBP) Undermined by Mounting Recession Expectations

The Pound (GBP) continued to fail to drum up support in the face of a looming recession.

Economists at Goldman Sachs, having already forecasted an impending recession, have predicted that inflation in the UK could soar past 20% if rising energy prices fail to retreat. With inflation set to continue rising, further interest rate hikes can be expected from the Bank of England (BoE). They said:

‘In a scenario where gas prices remain elevated at current levels, we would expect the price cap to increase by over 80% in January, (with) headline inflation peaking at 22.4%, well above our baseline forecast of 14.8%.

‘The Bank of England (BoE) looks set to raise interest rates by 50 basis points to 2.25% next month, it saw upside risks to its forecasts for additional 25 basis-point hikes in following policy meetings.’

Meanwhile, UK credit card borrowing soared by the most since 2005. With the cost-of-living crunch set to worsen, households are turning to their credit cards and borrowed at the fastest rate in 17 years. A jump in 13% in the year up to July, consumers lent an extra £700m amid a cost-of-living crisis as inflation has hit double digits for the first time in 40 years.

Paul Dales, Chief Economist at Capital Economics, is pointing to the positives in that consumer spending is at least not slowing:

‘Some of the increase in consumer credit in July may be because some households are already turning to borrowing to make ends meet. But it is more normal for overall consumer credit to weaken during economic downturns.

‘Admittedly, as these data are in nominal terms, they are being supported by the rise in prices and are therefore perhaps suggesting that consumer spending is more resilient than it really is.’

Euro (EUR) Buoyed as Energy Prices Eased off Record Highs

The Euro (EUR) found some moderate support against its rivals on Tuesday as European energy prices have finally relaxed from its meteoric highs of €1000/MWh on Monday. Reports of the EU stepping in and stepping up emergency plans to tackle the looming energy crisis.

European Commission President Ursula von der Leyen announced that Brussels are orchestrating plans of an energy intervention to ease the energy crisis set to worsen in the winter. Von der Leyen explained of the plans at a speech in Berlin, also adding that cheaper renewable energy could offset soaring gas prices:

‘We will have to develop an instrument, that will happen in the next days and weeks, which ensures that the gas price will no longer dominate the electricity price.

‘We’ll have to ensure renewable energies are generated at lower costs, that those costs are transferred to consumers and windfall profits used to help vulnerable households.’

Meanwhile, further lending support to the Euro are reports that the EU were ahead of their gas storage goal by almost two months. A looming gas shortage, thanks to the slowdown of imports from Russia, fuelled fears of a gas shortage. Bloomberg reported the details:

‘Reserves in the EU were filled up to 79.4% as of Aug. 27 compared with the target of 80% by Nov. 1, according to Gas Infrastructure Europe inventory data.

‘The EU bolstered its storage rules earlier this year after levels last winter turned out lower than in past years, particularly in German sites controlled by Russian exporter Gazprom, a factor that added to sharp increases in energy prices.’

GBP/EUR Exchange Rate Forecast: Rising German Inflation to Weigh on the Euro?

Looking ahead, CPI readings for Germany could influence the Pound Euro exchange rate as expectations of inflation rising again could further bolster bets of another bold European Central Bank (ECB) rate hike.

Elsewhere, the continued cost-of-living crisis is likely to keep Sterling quiet unless the UK government decide to act and provide some form of fiscal support package to prevent millions of households descending into poverty this winter.

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