Euro Pound Exchange Rate Wavers as UK Politics Dent Sterling
The Euro Pound (EUR/GBP) exchange rate failed to stage a significant rebound today despite political upheaval weighing upon Pound (GBP) sentiment. Euro (EUR) headwinds remain persistent as recession concerns inspire bearish trading and the US Dollar (USD) strengthens.
At the time of writing, EUR/GBP is trading at £0.8463, up slightly from today’s opening levels.
Pound (GBP) Accrues Losses as UK Politics Remain Volatile
The Pound is under pressure today from the UK’s political situation, which sees Britain without a Prime Minister as Boris Johnson resigned yesterday with no clear successor.
Possible frontrunners for the position include Nadhim Zahawi, Liz Truss, Sajid Javid, Suella Braverman and Rishi Sunak. However, a poll released by JLPartners yesterday revealed that of the general public, those surveyed would rather have Labour leader Keir Starmer govern the country than any of the Tory candidates bar Rishi Sunak.
Lacking clear direction, the UK’s political scene compounds underlying GBP headwinds including inflation fears, dovish Bank of England (BoE) rhetoric and worries over the Northern Ireland protocol.
Inflation continues to drive UK living costs to painful highs: analysts at Cornwall Insight warn that British energy bills could hit £3,363 per year in January, up from £1,971 at present. Fearful of further stretching households’ budgets, the BoE has forecast a gradual tightening of monetary policy.
In contrast with aggressive rate hike projections from the Federal Reserve, Bank of Canada (BoC) and Reserve Bank of Australia (RBA), the BoE’s cautious approach dampens Sterling sentiment.
Meanwhile, the Northern Ireland protocol bill, which passed through the House of Commons last week, continues to threaten relations between the UK and EU.
Euro (EUR) Unable to Firm Amid Intermittent USD Strength
While trading in a mixed range against the Pound, the Euro rebounded against several of its peers today as a risk-off mood lent EUR support against more volatile currencies.
Intermittent weakness in the US Dollar likewise capped EUR downside: US non-farm payrolls printed above expectations, indicating healthy levels of hiring and inspiring risk-on sentiment to USD’s detriment.
Nevertheless, unchanged unemployment levels and increased rate hike bets for the Federal Reserve exacerbated fears of a recession amidst persistently high inflation levels. Bloc-specific recession fears likewise dampen EUR sentiment as energy prices soar amid fears that Russia will cease gas exports.
With geopolitical concerns never far from investors’ minds, the Euro has been unable to make significant headway: triggering further downside are fragmentation worries and Fed-European Central Bank (ECB) policy divergence.
The ECB has struck a more hawkish tone in recent weeks, but markets are concerned that an aggressive policy tightening approach risks exacerbating existing bond yield fragmentation across the bloc. Inflation remains low in some European economies, but in others far exceeds central bank target levels.
Euro Pound Exchange Rate Forecast: UK Politics to Drive Movement?
Looking ahead, a lack of significant data in both the UK and the Eurozone on Monday leaves the Euro Pound exchange rate to trade on external factors.
If the issue of UK leadership remains in the balance as politicians debate whether to elect an interim Prime Minister, EUR/GBP may firm on Pound headwinds; meanwhile, escalating fears of a recession are likely to inspire Euro downside.
