The GBP EUR exchange rate looked for support from traders despite the recent resignation of the Prime Minister, which left the nation in a state of ‘paralysis’ with no new policies to be implemented before Boris Johnson’s successor is named. The euro saw short positions reduced, but the single currency is still under pressure from energy prices. The UK will get another update on GDP this week.
The GBP to EUR looked to hold a recent rally from 1.1600 to 1.1800.
UK at risk of ‘paralysis’ if Johnson stays on
Senior Tories warned that the Government will be left paralysed for months if Boris Johnson decides to stay on in Downing Street until a successor takes over.
The Prime Minister announced his resignation on Thursday but told his reshuffled Cabinet that there would be no new policies until he is replaced.
That comes at a bad time for the UK economy, with people struggling due to higher inflation and industrial action threatened in different sectors of the business world. Former Prime Minister Sir John Major called on Johnson to depart immediately and pass the reigns to a “caretaker”.
Michael Gove, who the Prime Minister sacked last week, says that his former boss should be gone on Monday. The pound sterling may struggle to advance if the country is hamstrung by the leadership race, which already attracted many names.
Tuesday will have economic data in the form of BRC retail sales for the UK and ZEW economic sentiment numbers for the European and German economies. That will come ahead of Wednesday’s German inflation and 3-month UK GDP figures for May, which could lead to a more volatile day in sterling.
Short positions in the euro scaled back after ECB comments
Short positions in the euro were scaled back last week after the latest ECB comments on market fragmentation.
Rabobank reported that net EUR speculators’ positions reduced after the ECB threatened to intervene in the event of market fragmentation. That relates to the recent surge in Spain and Italy bond yields versus the German benchmark. The market wants more details on that plan, but recessionary fears based on potential gas shortages this winter kept the pressure on the single currency.
Dutch benchmark gas futures hovered near their four-month highs after German supplies dropped to zero. There were also fears over industrial action in the Norwegian gas industry, which were solved by government intervention.
The euro is almost trading at parity against the US dollar for the first time since its inception. Investors are now preparing for even lower prices with the energy market problems.
Rabobank also expects a “mild recession” in the Dutch economy. “We expect economically tougher times with a mild recession in the last quarter of 2022 and first quarter of 2023,” analysts said.
But the ECB plan met criticism from German official Joachim Nagel, who said:
“Monetary policy must not be driven by what are often very short-lived developments in the financial markets”.
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