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Pound Euro Exchange Rate to Slide Further on Hawkish ECB?

Pound Coin on Euro Banknote GBP/EUR

GBP/EUR Exchange Rate Weakens amid UK Recession Fears

The Pound Euro (GBP/EUR) exchange rate is slipping amid economic concerns of a looming UK recession.

At time of writing the GBP/EUR exchange rate is around €1.1595, a 0.28% fall from this morning’s levels.

Pound (GBP) Undermined by Darkening Economic Outlook

The Pound (GBP) is struggling this morning amid a lack of economic data. Despite the hawkish nature of the Bank of England (BoE), fears of a looming recession could be weighing heavily on Sterling.

Despite raising interest rates to the highest levels since April 2008, the aggressive rate hiking cycle appears to be negatively impacting the UK economy. As inflation remains sticky at 8.7%, with core inflation accelerating at the fastest rate in 31 years, the cost-of-living crisis is dampening economic growth. Further tightening is now believed to tip the UK into a lengthy and shallow recession.

Elsewhere, with inflation remaining far above the target rate of 2%, the UK government is now planning to implement fiscal measures to curb headline CPI. However, the measures include slashing public sector pay which could weigh on household incomes, impacting the economy on worsening living cost squeeze.

Looking ahead, a speech from BoE Governor Andrew Bailey could influence the Pound. However, with concerns of the relentless tightening cycle potentially tipping the UK into a recession, investors will be hanging onto every word. A more cautious Bailey could sap demand further and Sterling could stumble further.

Euro (EUR) Supported by Hawkish ECB Speeches

Meanwhile, the Euro (EUR) is finding modest success on the back of a maintained hawkish stance from the European Central Bank (ECB). Several speeches from policymakers are confident of an interest rate hike in July with speculation growing of another one in September.

Earlier in the session, ECB policymaker Boštjan Vasle commented that the central bank needs to keep tightening at the next policy meeting. Citing that inflation remaining persistent across the Eurozone, and added:

‘Beyond that, we will remain data dependent. But the burden of proof will be on invalidating a rate hike, rather than validating one.’

Elsewhere, ECB Vice President Luis de Guindos also cheered EUR investors on saying that a July hike is all but assured. He added that September’s decision will be highly data-dependant, citing that underlying inflationary pressures could remain more stubborn than anticipated, leaving the door open to further hikes.

However, de Guindos also warned about the signs of weakness in the Eurozone economy as the economy could have stalled in June. He also cautioned that Europe’s slowdown may continue through to the second half of 2023, adding:

‘I think some of these downside risks have started to materialize and are becoming much more visible. The data that we are receiving about growth are not very good.’

Looking ahead, ECB President Christine Lagarde is expected to talk at the ECB Central Banking Forum. If she continues the hawkish tone maintained across the board, the Euro could climb further on elevated rate hike bets.

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