Pound Euro (GBP/EUR) Exchange Rate Nosedives as Mini-Budget Faces Fierce Criticism
(Updated 15:00, 23/9/22) The Pound Euro (GBP/EUR) exchange rate briefly spiked as the government announced its new mini-budget, only to then plunge to a 19-month low. At the time of writing, GBP/EUR is trading at around €1.1307. This is down over 1% on the day and close to its lowest levels since February 2021.
Chancellor of the Exchequer Kwasi Kwarteng unveiled his long-awaited mini-budget today, drawing fierce criticism from economists and opposition MPs.
Kwarteng announced £45bn in tax cuts designed to spur investment and economic growth. The Chancellor also revealed that he expects the government’s energy bill freeze to cost £60bn over the first six months. Both measures were unfunded, meaning they will be paid for through an additional £105bn of borrowing, at a time when borrowing costs are already at record highs.
The Institute of Fiscal Studies (IFS) has now published a full analysis of the mini-budget. In his summary, IFS Director Paul Johnson writes:
‘Today, the chancellor announced the biggest package of tax cuts in 50 years without even a semblance of an effort to make the public finance numbers add up. Instead, the plan seems to be to borrow large sums at increasingly expensive rates, put government debt on an unsustainable rising path, and hope that we get better growth. This marks such a dramatic change in the direction of economic policy-making that some of the longer-serving cabinet ministers might be worried about getting whiplash…
‘Mr Kwarteng is not just gambling on a new strategy, he is betting the house.’
In addition, the tax cuts announced today will hugely disproportionately benefit the wealthiest in the UK. Lower- and middle-income households will get very little from the cuts, leaving them exposed to the worsening cost-of-living crisis.
Worth repeating. Take all the tax changes coming in over next few years and:
If your income is < £155k, you lose
If your income is > £155k you win
If your income > £1m you gain more than £40,000 https://t.co/TkkGIKvNrl
— Paul Johnson (@PJTheEconomist) September 23, 2022
Fears of unmanageable public debt, persistently higher inflation, and restrictive monetary policy during a recession have alarmed Pound (GBP) investors, sparking a sharp sell-off.
Original article continues below:
Pound Euro (GBP/EUR) Exchange Rate Strengthens following Chancellor’s Announcement
The Pound Euro (GBP/EUR) exchange rate wavered on Friday morning as both the UK and Eurozone PMIs missed forecasts and markets awaited the British government’s mini-budget. However, as the government unveiled its new fiscal policy, Sterling spiked.
At the time of writing, GBP/EUR is trading at €1.1466, up almost 0.3% from this morning’s opening level of €1.1434
Pound (GBP) Recovers as Government Unveils Fiscal Policy
The Pound (GBP) fell sharply against the majority of its peers on Friday morning, but managed to hold its own against a struggling Euro (EUR), as GBP investors braced for today’s mini-budget.
Traders were nervous as Chancellor of the Exchequer Kwasi Kwarteng prepared to unveil the Treasury’s new approach to fiscal policy, which the government argues is a bold plan to grow the UK economy.
The Chancellor’s announcement was preceded by this morning’s PMI results, which printed worse than forecast. The all-important service-sector PMI revealed a contraction in activity this month, with the score falling from 50.9 – only just in expansionary territory – to 49.2. Economists had expected a score of 50, which represents stagnation.
This undoubtedly weighed on Sterling and added to investor anxiety ahead of the mini-budget.
However, GBP/EUR spiked as the Kwarteng announced a raft of new fiscal measures, including tax cuts and government borrowing of over £100bn, to pay for the planned energy price freeze and encourage investment and spending.
Markets seem hopeful that looser fiscal policy will help to drive growth in the UK, potentially preventing or alleviating the current UK recession.
However, there are worries that higher government borrowing at a time of soaring debt interest repayments could spell disaster for the public finances. These concerns could cap gains today.
Euro (EUR) Pressured following Weak PMIs
Meanwhile, the Euro is on the back foot after this morning’s Eurozone PMIs also came in worse than forecast. Both the manufacturing and services reports printed marginally below expectations, and both showed deepening contractions in business activity.
The latest survey results reveal that overall private sector activity in the Eurozone has contracted for three consecutive months, raising fears about a recession.
In addition, the Euro is suffering from its strong negative correlation to the US Dollar (USD), which is on the rise.
Pound Euro Exchange Rate Forecast: More Movement as Mini-Budget Faces Scrutiny?
As today’s session unfolds, analysis of the Chancellor’s mini-budget could drive most movement in the Pound. The government argues that its new path for fiscal policy will grow the UK economy. If commentators agree then Sterling could strengthen.
However, many economists believe that a sharp increase in borrowing is a huge gamble at a time when debt interest repayments are soaring. If the mini-budget raises serious concerns, the Pound could relinquish its gains.
As for the Euro, news from the Russia-Ukraine war could drive most movement. Any negative headlines or ongoing nervousness about the referenda in Russian-occupied Ukrainian regions could weigh on EUR.