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As Truss prepares to become UK PM, EUR/GBP falls to 0.86 and ECB policy chatter picks up
The EUR/GBP exchange rate has plummeted to approximately 0.86 thanks to new UK leadership. As a result of western sanctions, Russia has shut off energy supplies to the Eurozone, intensifying the region's energy crisis. As HICP has been measured at 9.1%, the ECB is likely to announce a another rate hike this week.
In the early Asian session, the EUR/GBP pair has fallen close to a key support level of 0.8600. After encountering resistance near Thursday's high of 0.8670, the asset is dropping at a respectable rate. The cross has abandoned the key support at 0.8610, resulting in a bearish reversal.
As a result of Liz Truss's victory in the Conservative Party leadership election, the bulls of the pound are experiencing a surge of adrenaline, which should prompt investors to anticipate further losses in the market. After the resignation of former British Prime Minister Boris Johnson, the pound faced headwinds from rising oil prices, a skyrocketing inflation rate, and political instability. Well, energy prices are still volatile, but the appointment of Liz Truss as the next British prime minister has mitigated the political danger.
According to Financial Times, since energy prices have become increasingly unpredictable due to Russia's supply restrictions, Britain's top energy supplier Centrica Plc is in talks with banks to get billions of pounds in more credit to satisfy soaring collateral demands. The escalating cost of energy is a serious problem for the British economy because it is largely responsible for the acceleration of inflationary pressures.
The economy of the Eurozone is also affected by huge fluctuations in energy costs. Russia has cut off Germany's energy supply from the Baltic Sea, citing leakage concerns. However, a subsequent Kremlin statement alleging western sanctions as the cause of Nord Stream 1 supply curtailment has exacerbated the energy situation in the trading bloc. Winter is approaching, and with it comes a dramatic spike in energy demand, which will place additional strain on energy reserves and finally lead to an increase in energy rates.
In addition to energy concerns, investors are awaiting Thursday's interest rate decision by the European Central Bank (ECB). Christine Lagarde, president of the European Central Bank, is likely to raise interest rates by 50 basis points (bps). The chosen inflation metric of the European Central Bank, the Harmonized Index of Consumer Prices (HICP), has surpassed 9% and must be brought under control as soon as possible.
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