As Bloomberg’s video suggests, the exceptional economic symptoms we are seeing are likely to have an impact across Europe.
That inflation has taken hold and recession is likely to follow are not news but the way changes are likely to affect the Pound-Euro exchange rate is less certain.
The days of 1.7 Euros to the Pound are long behind us and economists had been touting a 1:1 ratio as the coming norm. Understandable in a sense, although events often interfere with forecasts and that didn’t happen.
There have been fluctuations but around 1.2:1 has been the standard for much of 2022. The last week has seen this nearer to 1.17:1, with opinion divided on the future.
An Unpredictable Position
Exchange rates for the Euro are being put under significant pressure, by Europe’s reliance on Russian gas and uncertainty in the wider market. Domestic users apart, commercial gas use in countries such as Germany is high.
There are talks of individual pipeline issues but the extent to which Russia decides to use gas as a political weapon could increase. From claims of stoppages due to technical problems, to open decisions to be unhelpful.
The UK on the other hand mostly rely on gas supplies from Norway, which are more stable. A wish to fill storage facilities across Europe is affecting prices and even though they have been filled, many feel the EU will continue to suffer.
For all that, significant influencers such as Goldman Sachs are painting a bleak picture of the UK’s immediate future, suggesting that economic outlook is weaker than for any other major economy next year.
Persistently poor trade figures and increasing inflation are not helping, which also heighten the conundrum the Bank of England faces. How far do you raise interest rates to control inflation in the midst of recession.
Issues Beyond Energy
An energy crisis and the war in Ukraine are at the at the core of the EU’s problems, yet there are additional factors. The Eurozone’s economic output is being hit more than most, as is consumer health in the region.
The European Central Bank remain reticent to heavily increase interest rates, despite evidence of inflation. Yields on US, or UK government gilts and other assets are higher than those for investors holding similar EU assets.
Add to this a recent fall in the value of the Euro against the Dollar and how much the EU economy depends on energy for manufacturing. Confidence is not strong and this in a sense drives rates but will these factors outbalance the Pound’s weakness.
Outcome For The Pound
Despite recent falls, a number of forecasters still suggest the Pound will settle at around 1.2 Euros in the medium term. Better than people just had for their European holidays but is this also better for UK business.
The answer as always is that it depends on your business model. There will be winners but UK exporters who have already had to overcome Brexit changes can find that demand for their goods, or services falls if they are more expensive.
Whether looking at gain, or loss, we should remember that forecasts are just that and not certainties, we could write this page next week and be saying something different. The Pound remains a vulnerable currency, amidst political insecurity and fears on growth.
Business will go on but making, or taking payments which remain profitable may be an issue. The core message must be that this is a a good time to look at currency planning, to try to bring more certainty to trade.
if you need an ATA carnet for the EU, they should remain a stable force and we will be pleased to help. For much else, introducing a little stability to transactions makes sense.