The EURGBP exchange rate slumped through the support around the 0.8475 level and cleared the 2021 yearly lows. The pair now has the pre-virus lows in its sights and those reside around the 0.8300. Traders are driving the euro lower on expectations of a quick interest rate increase in the UK with the eurozone lagging in the inflation stakes.
The EUR to GBP rate trades at the 0.8425 level and would need to get back above 0.8475 to launch a recovery.
Eurozone energy shock to ripple through inflation and consumption
The recent energy shock is set to lift inflation forecasts and dampen the consumption recovery, according to analysts at ING. For European Central Bank hawks, that could support the argument for earlier tapering.
“The outcome of this crisis remains quite uncertain, and the severity of the European winter will matter a lot, but currently futures contracts imply a rapid decline of prices over the course of 2022. Even if that’s the case, the impact on consumers is likely to last for quite some time, denting private consumption and keeping inflation at elevated levels,” ING said
The bank also saw evidence that impacts of gas price increases on energy inflation is more lagged than for oil increases. That could mean that the gas price shock could last for quite some time due to different pricing regimes across the eurozone.
ING also expects that higher energy prices will “heat up an already heated debated at the ECB’s December meeting. A further upward revision to the ECB’s inflation forecasts now looks unavoidable,” they added.
German green party smooths the way for coalition
Germany’s green party has voted by a majority to join the country’s coalition talks. That will smooth the process of a potential ‘traffic light’ coalition.
Germany’s budding coalition partners will now start formal talks earlier than originally thought, creating hope that a new government will be formed before Christmas. However, one member of the FDP party could become a thorn in the EU’s side, according to the Express.
Christian Lindner, leader of the FDP, is likely to replace Olaf Scholz as Finance Minister and that could cause trouble for the bloc.
In 2017, Mr Lindner hit out at French President Emmanuel Macron’s economic plans, which he said risked turning the EU into a “Soviet Union-style system.
In the same year, he called for Greece to be temporarily kicked out of the Eurozone during the country’s financial crisis.
In the UK, Chancellor Rishi Sunak and the treasury are said to be readying an online sales tax in the country. A 5% VAT tax cut on UK energy bills is also being reported as the government tries to balance the books with an already strained populace after the recent energy sector issues and national insurance tax rise.
The UK economy will see the release of inflation figures in the middle of the week as the market continues to see a December rate hike from the BoE.