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Euro Pound (EUR/GBP) Exchange Rate Slides as US Dollar Strengthens

Euro Pound

EUR/GBP Exchange Rate Sinks on EU Inflation Concerns, Hawkish BoE Comments

The Euro Pound (EUR/GBP) exchange rate has come under pressure this morning as inflationary pressures hit the Euro particularly hard. The European Central Bank (ECB)’s reluctance to begin tightening its monetary policy weighs upon trading sentiment.

Meanwhile, the Pound (GBP) is enjoying tailwinds as the Bank of England (BoE)’s Michael Saunders hints at an early rate hike.

At the time of writing, EUR/GBP is trading at €0.8479, down 0.2% on this morning’s opening levels.

Euro (EUR) Subdued on Inflation Concerns, USD Strength

The Euro (EUR) is facing headwinds today as EU inflationary pressures are enhanced by the prospect of soaring energy prices.

Households are already facing higher bills, as energy intensive industries have started to slow production. According to the Financial Times,

‘While some in the gas industry believe the price surge is a temporary phenomenon… many others say it highlights a structural weakness in a continent that has become too reliant on imported gas.’

One of Europe’s contingency solutions, using ‘swing supplies’, is of less use than previously, with the bloc’s largest gasfield, Groningen, being slowly shut down as gas reserves become depleted. European authorities decided to close the plant as gas extraction was causing earthquakes in the surrounding area.

Also suppressing Euro sentiment, the US Dollar (USD) is finding renewed support in the wake of last week’s disappointing nonfarm payroll data. As a result of the strong negative correlation between EUR and USD, upside in the Dollar generally results in Euro weakness.

Pound (GBP) Trends Up as BoE Saunders Hints at Early Rate Hike

The Pound is trading up against the majority of its peers this morning as optimistic comments from Bank of England policymaker Michael Saunders buoy GBP sentiment.

Speaking to the Telegraph, Saunders warned that households should brace for the BoE to start raising interest rates ‘significantly earlier’ than previously thought, confirming that financial markets were right to bet on faster increases as the Consumer Prices Index heads above 4pc.

Saunders remarks: ‘I’m worried that there’s a part of the inflation pickup – not the gas price part, but the part driven by capacity pressures and higher pay growth – which could become more persistent unless monetary policy responds… I think it is appropriate that the markets have moved to pricing a significantly earlier path of tightening than they did previously.’

His comments come after the Bank of England’s chief economist Huw Pill also voiced fears over a ‘more long-lasting’ inflation threat to the UK.

The BoE rate hike speculation has helped to offset concerns over the UK’s economic resilience, as the country’s supply chain crisis weighs on business and consumer confidence.

Euro Pound Exchange Rate Forecast: ECB Speeches to Boost the Euro?

Looking ahead, speeches this afternoon from ECB officials this afternoon may drive movement in the EUR/GBP Exchange Rate.

If policymakers strike a hawkish tone, investors are likely to be encouraged by the prospect of imminent changes to monetary policy.

However, a dovish bias could depress EUR sentiment further still, pressuring the Euro Pound exchange rate.