The Pound to Euro (GBP/EUR) exchange rate is firming this morning, with the pairing trading at around €1.2006 after passing a key barrier of resistance this morning.
Euro (EUR) Exchange Rates Subdued amid Ukraine Concerns
The Euro (EUR) is trading on the back foot against the Pound (GBP) and the majority of its other peers this morning, as EUR sentiment is undermined by ongoing concerns over the state of the war in Ukraine.
Despite ongoing peace talks between Ukrainian and Russian officials, markets are concerned that Russia’s offensive is continuing to intensify.
While Russian forces continue to shell civilian targets in major cities across Ukraine, their progress so far remains slow, with US President Joe Biden warning Vladimir Putin’s ‘back is now against the wall’.
Biden suggests there is now a ‘clear sign’ that Putin is considering using chemical weapons in Ukraine.
Any further escalation by Moscow could force the EU into imposing even more sanctions on Russia, at the expense of the Eurozone economy.
Pound (GBP) Exchange Rates Tempered by Massive Jump in Government Borrowing Ahead of Spring Budget
At the same time, the Pound’s (GBP) gains are being tempered this morning in the wake of the UK’s latest public borrowing figures.
These revealed the government borrowed significantly more than expected to balance the books in February, with public borrowing jumping to £13.1bn against forecasts for a more modest £8.1bn deficit.
Last month’s dramatic jump in borrowing may have been a concern for Chancellor Rishi Sunak ahead of tomorrow’s budget, had recent borrowing figures not undershot expectations, likely leading to a smaller public deficit in the financial year 2021/22.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, comments: ‘Nonetheless, the substantial downward revision to borrowing in previous months leaves the full-year figure on track to greatly undershoot the OBR’s £183bn forecast; a figure between £150bn and £155bn now seems likely.’
Despite borrowing being below forecast and UK consumers facing a cost-of-living crisis analysts expect the Chancellor to opt for a light touch approach in tomorrow’s mini-budget.
Tombs continues: ‘We expect the chancellor to tread cautiously tomorrow, and to announce a limited package of measures, amounting to a net giveaway in 2022/23 of about £13bn, or 0.5% of GDP. That probably would mean that households still will experience this year the biggest annual decline in their real disposable income since the Second World War.’
This may come as a disappointment to GBP investors, who may be hoping Sunak could offer more support to households in the coming months.
GBP/EUR Exchange Rate Forecast: Rising UK Inflation to Bolster Sterling?
Looking ahead, the Pound to Euro (GBP/EUR) exchange rate could firm ahead of tomorrow’s Spring Budget with the publication of the UK’s consumer price index.
February’s CPI figures are expected to report another surge in domestic inflation. Should last month’s inflation figures print more strongly-than-expected it could stoke hopes the Bank of England (BoE) might reconsider its dovish policy outlook.
On the other hand the rise in inflation could be seen as a liability for Sterling if February’s CPI release is not seen as being strong enough to prompt a rethink from the BoE.
In the meantime a speech by European Central Bank (ECB) President Christine Lagarde later this afternoon could influence the euro, with any reinforcing of the bank’s reluctance to raise interest rates likely to weigh on EUR exchange rates.