EUR GBP Takes aim at 0.8500 Support Level

The EUR GBP exchange rate was flat on Monday but could make a move to test the 0.8500 support level this week. The euro versus pound sterling pair is light on economic data this week but has ECB meeting minutes on Thursday. Eurozone inflation pushed higher to 3.4% YoY in September and core inflation to 1.9%. The ECB had expected higher inflation, but not this high, and that could start to affect the pair.

The EUR to GBP rate trades at 0.8550 and has tested the lower support twice this year.

Pound traders confused over stagflation issue

British pound traders are unsure how to trade the current outlook, according to ING.

Analysts said that the energy story and fears of inflation are an issue for the UK economy but actually lead to the Bank of England tightening its policy earlier than expected.

The analysis said:

“Given that the market now prices a 10bp hike at the November BoE meeting and another 50bp in 2022, the market will hang on the BoE’s every word. Here Dave Ramsden speaks on Tuesday. Ramsden is a hawk and recently voted to end BoE bond buying early. Let’s see if he pours any more oil on the fire of early BoE tightening.”

The European Central Bank Chief Christine Lagarde said last week that the economy will need stimulus measures for a longer period, so the pound should continue to benefit from rate differentials.

What will the new German government look like?

It’s now a week since the German elections and the country is faced with the new situation of having to form a three-party coalition. Both the center-left Social Democratic Party (SPD) and the center-right Christian Democrats (CDU/CSU) could have the opportunity to form a government.

The SPD’s candidate, Olaf Scholz, believes the next German government should be formed by a coalition of the SPD, the Greens and the Free Democrats (FDP). For the outgoing Merkel’s CDU, this is an unprecedented setback. The party has accepted a “painful loss” but still wants to cling onto power.

The new German government will affect the EU’s decision-making on a range of key issues, such as the pandemic economic recovery path and relations with the United States, Russia and China.

Scholz has hinted at reducing the automatic alignment that the EU has with the US, while he has also criticized Brexit a day after his win. A new path on foreign policy could benefit the likes of China, but there are also big issues to consider with the size and scope of the union and Germany’s economy will also have to deal with the current painful rise in inflation to 4.2% which may yet force a policy change by the ECB.

The German Greens have slammed Angela Merkel for slowing down the country’s transition to electric vehicles. A new German government is set to hear louder voices for climate and changes in energy policy.

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