Market Analysis: GBP Makes a Sudden Dip against EUR. Is a Recession Finally Looming, or is it Just a Blip?

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Ever since the dawn of the new era which suddenly appeared at the beginning of this decade, mainstream opinion in the British press has been that a recession is on its way.

When the lockdowns finished almost two years ago, the overall opinion was that many business sectors had been damaged tremendously by government mandated closures, and that public borrowing and spending had been exponentially high during 2020 and 2021, and that a recession was on the way.

The recession didn’t actually materialise.

Following the aftermath of lockdowns was a cost of living crisis, which began in 2021 and is still very much part of everyday life for many people across the United Kingdom today, and with unaffordable bills and skyrocketing costs of energy products compounded by interest rates at over 5% when they had been below 1% just three years ago, the majority of people have been focusing on essentials rather than items considered not so necessary.

Talk of a recession continued, but the recession still did not begin.

Now, three years after what could perhaps be called the ‘new era’ began, talk of recession is once again present across the airwaves and written press in the United Kingdom.

The British pound has responded to this by once again dropping considerably against the euro, depreciating from the high 1.17 mark at the start of the trading day in London this morning, to the low 1.16 mark by midday UK time.

The reality is that all the pound has actually done is fall back down to where it was before trading began yesterday morning.

The interesting movement here is not today’s decline which puts its value against the euro at the lowest in five days. In reality, the interesting movement is that it soared yesterday during the entire trading day and then suddenly depreciated back down to the same value that it had against the euro last week.

Volatility of that nature is relatively rare withn major currencies, especially those trading against the euro or US dollar, but this quick rise to 1.5 cents higher against the euro and then back down again represents just that – sudden volatility.

Indicative pricing only

Even last year, during the very pessimistic outlook held by many economists over Britain’s post-Brexit, post-lockdown, energy crisis-embattled economy, the pound steadily dropped in value over a period of months against the euro and the US dollar as would be expected if so many negative factors face one of the world’s most important economies.

The sudden ceasing of that downward direction and the pound’s resurgence at the beginning of this year demonstrated a very unusual quick change of direction for a major currency.

This same situation is here now, with analysts erring on the side of caution and not really saying much other than vagaries such as Britain faces future economic setbacks, which does not really display any actual reason why the pound suddenly fluctuated over the past two days.

Possible interest rate increases are not out of the equation, but that is the case across mainland Europe and North America, meaning that most of the economies that are home to major currencies face similar challenges.

The talk of recession is just that – talk. Retail sales and home purchase transactions, as well as new car registrations are all strong in the United Kingdom, meaning that whilst there is a focus by many people on ensuring the affordability of important bills, spending on retail items, buying property and new cars is still very much unaffected.

The main consideration remains whether this is a blip caused by more sensationalist news items over the past two days, or whether a recession is actually on the cards. Moreover, if it is on the cards, whether the public have become weary of hearing constant references to a possible recession for over two years, when no such recession took place.

It’s uncertainty such as this which drives volatility, and therefore the pound’s position against its major peers is one to watch.

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This article represents the opinion of the Companies operating under the FXOpen brand only. It is not to be construed as an offer, solicitation, or recommendation with respect to products and services provided by the Companies operating under the FXOpen brand, nor is it to be considered financial advice.

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