Pound / Euro Exchange Rate Rallies As Sunak Becomes PM

The Pound (GBP) strengthened against the Euro (EUR) on Monday as markets reacted to Rishi Sunak becoming the new Prime Minister.

This saw the GBP/EUR exchange rate climb to around €1.1527 at the time of writing, an increase of roughly 0.6% from Monday’s opening rates.

Pound (GBP) Exchange Rates Jump as Sunak Becomes Prime Minister

The Pound (GBP) has rallied against all major peers on Monday, as the Conservative leadership race drew to a close.

As Rishi Sunak was chosen as the next Conservative Party leader and Prime Minister, Sterling has drawn support. GBP investors have reacted positively to the news, believe he will continue the current fiscal program outlined by Chancellor Jeremy Hunt. As such, both GBP and bond yields rallied.

The effect of Sunak looking like the favorite was explained by Susannah Streeter, the senior investments and market analyst for Hargeaves Lansdown. She stated: ‘It’s an indication that bond vigilantes have been pacified by the expectations of a calmer political horizon ahead with fiscal responsibility forecast to be the new mantra of the incoming Prime Minister. Whoever clinches the leadership, faces a daunting task given the looming recession, volatile energy prices, continued supply chain tangles and labor shortfalls and a Bank of England determined to raise interest rates in the face of a shuddering economy to bring rampant inflation under control.’

However, GBP’s gains may have been tempered by Monday’s release of October’s flash PMIs. The manufacturing sector had fallen from 48.4 to 45.8, while the services sector dropped from 50 to 47.5. The slump in both sectors is indicative of the UK heading towards a recession.

Euro (EUR) Exchange Rates Mixed amid Poor German PMIs

The Euro (EUR) saw mixed trade on Monday, as German PMI flashes for October came in below forecasts.

German manufacturing was down from 47.8 to 45.7, while services fell from 45 to 44.9. With the Eurozone’s largest economy showing another consecutive month of contraction in key economic areas, recession fears capped any wider gains EUR could make on the market.

The data was expanded upon by Andrew Kenningham, the Chief Europe Economist at Capital Economics. He stated: ‘The flash PMIs for October provide yet more evidence that the euro zone is sliding into quite a deep recession but that inflationary pressures remain intense. The limited country breakdown available so far shows that Germany is in much deeper trouble than France. All told, these surveys are consistent with our view that the euro-zone economy will contract further than the consensus or ECB anticipates and that inflation will remain high.

With various economies in the bloc sliding towards recession, the Euro saw headwinds during Monday’s session.

Elsewhere, the continuing Ukraine-Russia conflict put pressure on EUR. As the situation in Kherson continues to escalate with a conflict between the sides expected, EUR has felt the strain with investors remaining cautious.

Pound Euro (GBP/EUR) Exchange Rate Forecast: New Prime Minister in Focus

Looking ahead, the Pound Euro (GBP/EUR) exchange rate may remain beholden to domestic news from the UK.

With Rishi Sunak taking office, it remains to be seen how he will navigate the current issues striking the Pound. If he continues to restore investor confidence in the UK, the Pound could be bolstered.

For the Euro, the primary core of movement may come from the European Central Bank (ECB)’s interest rate decision on Thursday. With a 75bps increase largely priced in, any further hawkish sentiment from ECB policymakers could support EUR even further.