Pound Euro (GBP/EUR) Exchange Rate Continues to Tumble following Autumn Budget

Pound Euro (GBP/EUR) Exchange Rate Extends Downside after Autumn Budget Announcement

(Updated 16:15, 27/10/21) The Pound Euro (GBP/EUR) exchange rate continued falling today as Rishi Sunak set out the autumn budget.

The Chancellor sought to strike a positive tone, saying his budget would usher in an ‘age of optimism’ and a stronger, post-Covid economy. With the Office for Budget Responsibility (OBR) upgrading its GDP growth forecast to 6.5% from 4% in its March forecast, Sunak was able to increase government spending by £150bn while reducing the budget deficit to pre-pandemic levels.

However, most of the spending pledges had already been announced, which may explain why the budget seemed to have a limited impact on the Pound (GBP).

In addition, analyses of the budget are now coming in, with the Chancellor facing criticism for increasing the tax burden on UK households during a cost-of-living squeeze.

The OBR has also evaluated the budget, finding that the government is able to hit its targets but without much headroom. For his debt target, Sunak has only 0.6% of GDP headroom, which is less than typical forecast errors.

These caveats could be weighing on the Pound today, although we may see more movement as markets digest the budget.

Additionally, Brexit tensions could be weakening the Pound Euro pair. In Prime Minister’s questions (PMQs) this morning, leader of the DUP Sir Jeffrey Donaldson asked Boris Johnson if he agreed that the conditions for triggering Article 16 had been met. Johnson replied that they had, adding that while negotiations were underway:

‘If we can’t see progress – as we have been saying now for some months – if we can’t see rapid progress in the way that we spelled out in our command paper then I think it is clear to everybody that the conditions for invoking Article 16 have already been met.’

Since these comments, Donaldson has threatened an early Stormont election if the government does not act.

With Brexit tensions bubbling and concern over the UK economy persisting despite the budget, the Pound Euro exchange rate has continued weakening today. GBP/EUR dropped to lows of €1.1811 earlier and is currently trading at €1.1836, down 0.27% from today’s opening levels.

Original article continues below:

Pound Euro (GBP/EUR) Exchange Rate Dips as Investors Await the Autumn Budget

The Pound Euro (GBP/EUR) exchange rate has softened this morning as GBP investors stay quiet ahead of the autumn budget this afternoon. Meanwhile, the Euro (EUR) is supported by a surprise rise in German consumer confidence.

The Pound Euro pair is currently trading at around €1.1844, down 0.2% from this morning’s opening level of €1.18683.

Pound (GBP) Muted ahead of Autumn Budget

The Pound (GBP) seems subdued so far today as GBP investors await the autumn budget this afternoon.

Chancellor Rishi Sunak will try to strike an upbeat tone when he announces the budget later today, declaring that the UK is entering an ‘age of optimism’ as it emerges from the pandemic.

The Chancellor has already hinted at a number of policies contained within the budget, including an increase in the National Living Wage and pay rises for public-sector workers.

However, a number of tax increases are also due to be announced. Some have been confirmed by the UK government in weeks past, such as the rise in dividend tax rates and National Insurance, though analysts also predict further taxes to pay for the Chancellor’s spending pledges.

At a time when the UK’s economic recovery looks fragile and households are facing a cost-of-living squeeze, Sunak’s budget may be under even more intense scrutiny than usual.

After the autumn budget, the Office for Budget Responsibility (OBR) will release its latest ‘Economic and fiscal outlook‘ report, which sets out a forecast for the UK economy and public finances.

GBP investors are likely waiting until after the budget before placing any aggressive bets, which is leaving the Pound muted this morning. So far the Euro has been able to gain from this inactivity in GBP, with the Pound Euro exchange rate dipping slightly.

Euro (EUR) Firms following Rise in Consumer Confidence

Meanwhile, the Euro (EUR) has firmed so far in today’s session after Germany’s consumer confidence unexpectedly improved heading into November.

The GFK consumer climate indicator rose from 0.4 to 0.9, its highest level since April 2020, beating expectations of -0.5.

However, the single currency’s gains may be capped as markets fully digest the data. The gauge was mainly pushed up by an increased propensity to buy, which is likely due to fears that prices will rise even higher in future months. Rolf Bürkl, Consumer Expert at GfK, explains:

‘German citizens are clearly expecting further price increases. That is why they consider to make purchases, in order to avoid even higher prices. If the surge in prices continues, it would put a strain on consumer sentiment and a fundamental recovery would likely be further delayed.’

Nevertheless, the Euro has managed to firm against the Pound this morning.

Pound Euro Exchange Rate Forecast: Sterling to Strengthen on Upbeat OBR Forecast?

Looking ahead, we may see some big movement in the Pound Euro exchange rate this afternoon as markets react to the budget announcement.

While movement may depend on what Sunak unveils, and how analysts respond, there could be volatility as markets react, unpick and reposition.

Following the announcement, the OBR’s forecast will also likely affect the Pound Euro pair. The EY Item Club, a leading UK economic forecasting group, believes the OBR will upgrade its 2021 GDP growth projection to 7% from 4% at its last forecast in March.

The OBR will also publish its estimate on how much economic scarring the Covid pandemic has caused. In March, the OBR estimated scarring would be at about 3%, but since then the Bank of England (BoE) has suggested it could be as low as 1%.

If the OBR’s latest forecast is more upbeat than its previous one, then the Pound could strengthen overall.

Samuel Birnie

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