The pound has recovered against the US dollar and is higher against the euro. The recovery is due to a weakness in the US dollar, after a positive shift in risk sentiment, with news of Shanghai reopening, which have weakened the safe-haven US dollar. Analysts have noted that any further boost to the GBP/USD might be unlikely, as US Treasury yields continue to rise.
Additionally, the difference between the Fed and BoE’s monetary policy will possibly keep the pound under pressure, at least in the near term.
In the coming week, traders will turn their focus on UK inflation data, while headlines regarding market sentiment and Brexit will also provide direction.
Gas supplies to Europe
The euro has fallen against the pound and the US dollar as rising gas prices could push the Eurozone economy into recession later in 2022 and deter the European Central Bank from raising interest rates. The currency market is expecting less interest rates now as stagflation fears have risen. Russia’s squeeze in gas supplies to Europe and a surge in European gas prices have added to concerns. Natural gas prices surged in Europe on Thursday after it was revealed that Russia was sanctioning energy companies. Russia listed 31 companies which are banned from conducting transactions and entering Russian ports. Gas transit to Europe via Ukraine has also been restricted.
The gas supply disruptions through Ukraine and then to Germany have pushed growth expectations lower.
With lower rate hike expectations, the euro has weakened and any boost it may get from a more positive ECB rhetoric could be short-lived. The pound rose as a result of the euro’s weakness.
The realisation that inflation could lead to recession, and the fall of the euro follows the Bank of England’s recession warning and the fall of the pound last week.
Eurozone recession risks
Concerns about the Eurozone economy have been voiced by various CEOs who fear the worst. Bosch CEO Stefan Hartung said: “For sure, we see a big recession in the making, but that’s exactly what we see — it’s in the making. There is still an overhanging demand because of the Covid crisis we just are about to leave. It’s still there and you see it heavily hitting us in China, but you see that in a lot of areas in the world, the demand of consumers has already even been increased in some areas.”
Eurozone investor morale has dropped in Europe to its lowest level since June 2020 following the war in Ukraine. According to the latest Sentix index of investor confidence, the index fell to a near two-year low in May (-22.6). Investors were pessimistic about the current economic situation, and the economic outlook with recession becoming visible in the euro area.
Further euro weakness
Analysts warn that the euro could fall further if Russia restricts gas supplies which is something that is increasingly possible as the Russian army has failed to make any progress in eastern Ukraine.
This could lead Russia to attack the West by limiting European gas supplies which could affect Eurozone economy and the growth outlook, while hurting market sentiment towards the euro. The war in Ukraine has tied the euro to energy supplies. For most economists, the possibility of a recession in the Eurozone has risen and the euro will be sensitive to news and developments concerning the region’s growth and potential risks.
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