After plunging at the end of last week, the Pound Euro (GBP/EUR) exchange rate remains in a precarious position today. Having briefly touched a two-year low, Sterling has clawed back some losses, although it remains compromised.
What’s Been Happening: GBP/EUR Collapses as Budget Spooks Investors
The Pound (GBP) wavered higher against the Euro (EUR) through the first half of last week, as expectations of a 75-bp interest rate rise from the Bank of England (BoE) supported Sterling.
However, the BoE opted for a smaller half-point hike, which saw GBP/EUR relinquish some of its gains.
Meanwhile, concerns about a possible escalation in the Russia-Ukraine conflict weighed heavily on the Euro. Vladimir Putin announced a partial mobilisation and made nuclear threats, rattling EUR investors.
On Friday, Sterling initially ticked higher, although both the UK and Eurozone PMIs revealed troubling results.
The upside was short-lived. The Pound then collapsed after Chancellor Kwasi Kwarteng announced the government’s mini-budget.
Kwarteng unveiled £45bn of unfunded tax cuts – the largest tax-cutting event in 50 years. With government borrowing expected to rise £400bn over the coming years, investors lost confidence in the UK. Markets went into meltdown, with Sterling, stocks and government bonds all plunging. GBP/EUR dropped to a 19-month low.
Three Things to Watch Out for This Week
- BoE Announcement
After the Pound imploded, economists have been predicting an intervention from the BoE. If the bank announces an emergency rate rise to shore up Sterling, GBP/EUR could regain some ground.
- Eurozone Inflation Rate
Markets expect the Eurozone’s flash CPI to jump from 9.1% to 9.6%. Such a reading would likely boost European Central Bank (ECB) rate rise bets, thereby supporting the single currency.
- Russia-Ukraine News
Tensions between Russia and the West are escalating; any developments could have a big impact on the Euro.
GBP/EUR Forecast
With UK investors still in shock following Friday’s fiscal announcement, GBP/EUR may remain near a two-year low this week. However, any surprise events – such as an emergency rate hike from the BoE or an amendment to the mini-budget – could help Sterling recover.
At the time of writing, markets are rapidly rising up their expectations for Bank of England interest rates.
Blimey. Investors are now better on UK interest rates topping 6 per cent by the first half of next year. You can see the expectations rising literally by the minute… pic.twitter.com/fFMmAjmFoF
— Ed Conway (@EdConwaySky) September 26, 2022
We expect the BoE to intervene in some way this week. A surprise rate rise of 100 or 150 basis points could be on the cards. But will this be enough to save Sterling from its collapse?