Pound Euro Exchange Rate News: GBP/EUR Weakened on Bolstered ECB Rate Hike Bets

Modified: Friday, 2 September 2022 14:35 BST - Written by John Cameron

STORY LINK Pound Euro Exchange Rate News: GBP/EUR Weakened on Bolstered ECB Rate Hike Bets

The Euro (EUR) Firmed Despite Downbeat German Data

The Euro (EUR) is strengthening despite the balance of trade in Germany widely missing the forecast. The trade surplus fell drastically to €4.9bn in July, missing expectations of €6.2bn.

However, lending considerable support is increased expectations of another bold interest rate hike at the next policy meeting. After Reuters’ economists noted that expectations of a 75bps hike are now being priced at an 80% probability. In the face of higher-than-expected inflation rates and the challenge of reining it in, the European Central Bank (ECB) will need to step up their monetary policy, according to Nerijus Maciulis, an economist at Swedbank. He said:

‘The ECB will continue hiking rates at an accelerated pace and will send a hawkish message. It needs to repair its reputation and be able to claim victory once inflation starts retreating.’

Further propping up the Euro is the somewhat weakening of the US Dollar. With unemployment figures missing forecasts and ticking higher to 3.7%, the highest level since February. Following from a better-than-expected non-farm payrolls data, considerably lower from the previous month but still better than expected.

Meanwhile, tensions are beginning to simmer once again over the hot topic of Brexit. With the UK leadership race set to end on Friday, the prospect of frontrunner Liz Truss taking the reins has left the EU uneasy. Following on from disparaging comments about France’s leader Emmanuel Macron, and her hard-line stance on the Northern Ireland protocol, renewed concerns of a UK/EU trade war are back on the table.

Nils Schmid, Foreign Policy spokesperson for Germany’s ruling Social Democrat party said:

‘One must also give the new prime minister a chance. But anyone who believed that things could not get any worse after Johnson is being proved wrong. Many of Mrs. Truss' statements are unfortunate or wrong.’

Pound (GBP) Slumped Further on Ever-Darkening Economic Outlook

The Pound (GBP) continued its downward spiral amid a looming recession as the cost-of-living crisis is yet to peak.

The British Chambers of Commerce (BCC) have released their quarterly report, forecasting an impending recession in the coming months. Further calls for government intervention are growing, as both households and small firms are at risk. Baroness Ruby McGregor-Smith, President of the BCC, said:

‘We’re not just talking about big businesses, many of whom are going to really, really struggle. We’re talking about more and more and more SMEs, which are the lifeblood of our economy. So, they need more support now, as they did during Covid.’

Meanwhile, polling for the Conservative leadership finally comes to close at 5pm on Friday. Frontrunner Liz Truss or Rishi Sunak will be announced as the next prime minister on Monday, ending months of political uncertainty and volatility. However, unless Boris Johnson’s replacement hits the ground running with implementing swift and sufficient financial aid, investors could remain deterred.

GBP/EUR Exchange Rate Forecast: Hawkish ECB to Buoy the Euro?

With the data calendar now finished for the Pound Euro exchange rate, all eyes will be on the ECB policy meeting next week. Surprise uptick in inflation and PPI data bolster bets for a 75bps rate hike, potentially boosting the single currency.

Meanwhile, the announcement of the new Prime Minister to replace Boris Johnson will take place on Monday. After months of uncertainty, the turmoil is hoping to come to an end. Investors will be keenly waiting for further financial support for UK households and businesses.

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TAGS: Pound Euro Forecasts