The GBP EUR exchange was higher this week as the pair tries to grind higher through the inflationary pressures in the UK. Employment was strong for the UK, while the European economy saw its growth forecasts downgraded. Attention will turn to this week’s PMI figures to see how manufacturing and services are coping in the UK and Europe against a backdrop of various global pressures.
The GBP to EUR touched 1.1900 on the week but slipped back to trade at 1.1800 into the weekend.
BoE’s Bailey warns of ‘apocalyptic’ food prices, government hits back
The Bank of England’s (BoE) governor warned of “apocalyptic” food prices last week, while he added that he feels “helpless” amid soaring inflation.
Bailey was unhappy with criticism that policymakers had acted slowly in its efforts to tackle inflation, blaming a “bad situation” on external shocks such as the war in Ukraine and the China lockdown.
“We can’t predict things like wars – that’s not in anybody’s power,” he said.
But he was more concerned about food supply chain issues arising from Ukraine.
“The inflation risk factor that I am going to sound rather apocalyptic about is food,” he said.
After speaking to Ukraine’s finance minister, Bailey said that farmers in the country are able to plant crops this spring but have “no way” of shipping them out.
“Ukraine does have food in store, but it can’t get it out at the moment,” he said.
“As things stand at the moment it’s getting worse,” he continued. “And that is a major, major worry.”
But Cabinet minister Brandon Lewis said he was “surprised” by the language Mr Bailey used to describe the rising cost of living pressures.
European Central Bank being led by hawkish commentators
The European Central Bank (ECB) is coming into focus for interest rate hikes after the latest inflation data. Meeting minutes show that the hawkish members of the central bank are taking control over the policy direction.
Markets have now increased their ECB rate hike expectations with expectations for rates more than 100bp higher. The ECB are expected to use the June meeting to start the process for rate hikes by announcing the end of net bond purchases. That could open the door for 25bp of hikes at each of the other four remaining policy setting meetings in 2022.
ING analysts said:
“The minutes of the ECB’s April meeting just confirmed that the hawks increasingly have the upper hand in discussions. A rate hike in July is no longer uncertain, the only uncertainty is whether it will be 25bp or 50bp.”
Markets will also be keeping a keen eye on the Northern Ireland protocol issue this week, with Joao Vale de Almeida of the EU saying that he wants to “fix, not nix” the deal. The UK has confirmed that it wants to change elements of the protocol and that brings threats of retaliation from the EU and a souring of the post-Brexit trading relationship.
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