Pound Euro Exchange Rate News: GBP/EUR Remained Volatile as UK Economy on Brink of Recession

October 12, 2022 - Written by John Cameron

STORY LINK Pound Euro Exchange Rate News: GBP/EUR Remained Volatile as UK Economy on Brink of Recession

Pound (GBP) Surged Despite GDP Contracting

The Pound (GBP) enjoyed a surge in demand on Wednesday despite a myriad of headwinds threatening to sap investor confidence. However, the volatile nature of the Pound could see a slowdown soon.

An unexpected contraction in the UK economy for the month of August showed GDP growth shrank by 0.3%. Against forecasts of zero growth, a stagnation, the economy instead edges ever closer to a recession. In the three months leading up to August also showed a contraction of 0.3%, with a considerable slowdown in manufacturing being the main driver.

The near-term future of the economy looks set to slow sharply as inflationary pressures are exacerbated by the political and economic instability gripping the UK. Suren Thiru, Economics Director for ICAEW (Institute of Chartered Accountants in England and Wales), has criticised the mini-budget for exerting further pressure on the economy:

‘The government has needlessly risked a longer recession with any boost from the energy package likely to be dwarfed by a sustained squeeze on UK output from persistently high inflation, punishing interest rate rises and acute financial market turbulence.’

Meanwhile, the Bank of England (BoE) confirmed it will not extend its bond-buying scheme beyond October 14. Hopes of an extension buoyed investors as fears over pension collapses linger. However, a spokesperson for the central bank said:

‘As the Bank has made clear from the outset, its temporary and targeted purchases of gilts will end on 14 October.

‘The governor confirmed this position yesterday and it has been made absolutely clear in contact with the banks at senior levels.’


Elsewhere, Business Secretary Jacob Rees-Mogg has blamed the BoE for the market turmoil in the wake of the mini-budget. Rees-Mogg refused to accept responsibility on behalf of the UK government as he believes the central bank should have raised interest rates enough. He said:

‘I would point to the day before, when the monetary policy committee did not put up interest rates as much as the Federal Reserve had. And that was the more profound effect on markets.’

Euro (EUR) Wavered amid Ukraine Invasion Fears

Meanwhile, the Euro (EUR) is struggling for demand against a backdrop of the ever-escalating conflict in Ukraine. With hopes of a peaceful resolution long gone, Putin’s recent ‘annexation’ of Ukrainian regions have only served to exacerbate tensions. Russia continues to launch missile attacks in several Ukrainian cities, engaging in the most intense air strikes since the start of the invasion.

Elsewhere, lending some modest support to the Euro is the better-than-expected industrial production MoM for August. Against expectations of a mild 0.6% rise, production surged to 1.5% as manufacturers boosted investment. However, mounting fears of a recession have failed to lift investors’ spirits. Andrew Kenningham, Chief Europe Economist at Capital Economics confirms these fears:

‘All the evidence suggests that euro zone industry is heading for a significant contraction in the coming months.’

GBP/EUR Exchange Rate Forecast: ECB Speech to Boost the Euro?

Looking ahead, the Pound Euro exchange rate could trade more erratically on a speech from European Central Bank (ECB) President Christine Lagarde. With the central bank lagging behind other banks in raising interest rates. Any hints of further interest rate hikes could inspire movement for the Euro.

Meanwhile, the volatile nature of the Pound could see further fluctuations as any announcements from either the BoE or the UK government could weigh on the Pound.

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TAGS: Pound Euro Forecasts