Although inflation appears to be waning in some countries, the recovery is unequal. Policymakers across America, Europe and Great Britain have taken proportionate measures to address rising prices, but currency markets continue to worry that raising interest rates at a time when real wages are low could cause a recession.

How has GBP/EUR been affected so far?
The pound to euro (GBP/EUR) exchange rate has broadly fallen over the last couple of months, hitting a 13-month low as inflation in the UK soared to a 40-year high of 9.1% in May.

The UK’s latest jobs report confirmed that real wages were falling at their fastest rate in over a decade as surging inflation outpaces pay rises. Unrest over rising living costs is also damaging Sterling sentiment, triggering strike action and threatening further disruption to the economy.

In Europe, inflation is putting pressure upon various governments, as the European Central Bank (ECB) prepares for its first interest rate hike in 11 years.

However, the euro is less affected than Sterling, as Europe’s economy is proving to be more resilient, with inflation currently sitting at 8.6%.

Where did inflation come from?
The Covid-19 pandemic had a big effect on the global economy as demand for goods and services drastically reduced, then rebounded at a faster rate than production capacity. In the UK specifically, Brexit contributed towards inflationary pressures as trade with the rest of the world became more complicated. A persistent fall in the pound in recent months has also exacerbated the UK’s inflation woes by making imports more expensive.

In the Eurozone, Russia’s invasion of Ukraine has lead to a sharp spike in energy costs. Europe relies heavily on Russian energy and gas prices increased as the continent struggled to divest from Russian supplies.

BoE favours a slow and steady approach
Since December, the Bank of England (BoE) has raised rates by 25bps at each policy meeting. However, its gradual approach to tightening has seen the bank fall behind the curve, particularly in the wake of the Federal Reserve’s 75bps hikes. The bulk of the BoE’s members have been resistant to move any faster amid fears it could tip the UK into a recession. However, the failure to tame inflation could risk UK economic growth in other ways. Discontent over unmanageable price pressures has expressed itself in recent industrial action. Strikes are planned across the transport sector, the postal service, telecommunications, and the legal sector, threatening disrupt the UK’s already fragile economy and place more pressure on the pound euro exchange rate.

The ECB’s new, bold reign
Meanwhile, the European Central Bank (ECB) is attracting fresh support to the euro on account of its bolder stance.

At a recent discussion panel for central bank policymakers in Portugal, ECB President Christine Lagarde committed to “going as far as necessary” to ensure that inflation is stabilized in the Eurozone at the central bank’s 2% target.

The ECB is expected to hike interest rates by a further 50bps in September, with additional rate hikes to follow.

Protecting your money from future volatility
With inflation in the UK and Eurozone showing no sign of having peaked and the risks of a recession appearing to grow, it is likely the pound euro exchange rate will continue to trade with a high degree of volatility for the foreseeable future.

If you’re making transfers or payments in euros, keeping up to date with the currency markets can save you significant sums. Working with a currency broker, such as Currencies Direct, means you’ll have access to a range of tools and services to help navigate these uncertain times.

Currency Direct has helped over 325,000 individuals and businesses move money abroad since 1996. It has an ‘Excellent’ Trustscore on Trust Pilot, over 20 global offices, and a team of more than 500 currency experts.

For more detailed information, please contact the local office T: 289 395 739 or register at currenciesdirect.com/portugal to get regular updates on the currency markets.
(use AlgarvePLUS magazine as the reference)