Pound Euro Exchange Rate Volatile as BoE Intervenes amid Market ‘Dysfunction’

Pound Euro (GBP/EUR) Exchange Rate Fluctuates Lower following BoE Intervention

(Updated 14:30, 28/9/22) The Pound Euro (GBP/EUR) exchange rate slumped earlier today, before recouping some of its losses, as the Bank of England (BoE) announced an emergency intervention in financial markets.

At the time of writing, GBP/EUR is trading around €1.1102, down almost a cent from today’s high of €1.1192.

After Friday’s government mini-budget shattered investor confidence in the UK, government bonds started selling off rapidly. This could exacerbate a potential debt crisis that threatens to engulf the country amid an expected surge in government borrowing and already eye-wateringly high borrowing costs.

Despite initial reluctance to intervene, the BoE today announced plans to begin a temporary quantitative easing programme, buying long-dated UK gilts in order to stem the sell-off. The BoE will also postpone is quantitative tightening plans by a month.

While the move seemed to calm UK bond markets, the fact that Threadneedle Street has had to intervene at all demonstrates the severity of the crisis. In addition, the BoE’s wording hinted at the potential fallout should policymakers fail to stabilise markets:

‘Were dysfunction in [the government bond] market to continue or worsen, there would be a material risk to UK financial stability. This would lead to an unwarranted tightening of financing conditions and a reduction of the flow of credit to the real economy.

‘In line with its financial stability objective, the Bank of England stands ready to restore market functioning and reduce any risks from contagion to credit conditions for UK households and businesses.’

Following the announcement, GBP/EUR slumped more than 1.3%. It has since recouped some of its losses, but remains 0.8% down from today’s high.

Original article continues below:

Pound Euro (GBP/EUR) Exchange Rate Wobbles amid Headwinds on Both Sides

The Pound Euro (GBP/EUR) exchange rate is wavering in a narrow range today as both currencies face selling pressure.

At the time of writing, GBP/EUR is trading at around €1.1178, up marginally from the start of the European session and having recouped overnight losses.

Pound (GBP) in Dire Straits following IMF Rebuke

The Pound (GBP) remains compromised this morning as concerns over the government’s huge unfunded tax cuts continue to trouble investors.

In an unusual intervention, the International Monetary Fund (IMF) has openly criticised the UK government’s plans, urging the UK to ‘reevaluate’ its tax cuts.

In a statement, the IMF – one of the world’s most important financial institutions – said the plans were risky and ‘will likely increase inequality’.

For the IMF to publicly attack the fiscal plans of a leading global economy is incredibly rare. Many commentators think it underscores the danger of the UK’s current economic position.

This stinging rebuke comes amid growing global criticism of Liz Truss’s economic approach. Yesterday, former US Treasury Secretary Larry Summers labelled the plans ‘utterly irresponsible’.

Meanwhile, Moody’s – an influential credit rating agency – also criticised the government’s tax-cutting plans, saying ‘large unfunded tax cuts are credit negative’.

‘A sustained confidence shock arising from market concerns over the credibility of the government’s fiscal strategy that resulted in structurally higher funding costs could more permanently weaken the UK’s debt affordability.’

With global markets gravely concerned about the state of the economy and the public finances in the UK, Sterling remains weak today. Although it is currently edging up against the Euro (EUR), it is still below the 19-month low hit following the mini-budget on Friday. Any upside is likely to be severely limited.

Euro (EUR) Pressured as Russia Fears Intensify

Meanwhile, the Euro is also facing selling pressure today as the ongoing Russia-Ukraine war weighs on the single currency.

Four Russian-occupied territories in Ukraine have held referenda on joining the Russian Federation, although the global consensus is that Russia rigged the votes. Moscow is now likely to begin annexing those regions, raising concerns that attempts by Ukraine to recapture those territories will be seen by the Kremlin as an attack on Russia.

In addition, recent gas leaks in offshore sections of the Nord Stream pipeline – caused by explosions – are also raising concerns. The EU and many Nordic countries have said the leaks were likely due to an act of sabotage, stoking fears about energy and military security in the Baltic Sea.

Tensions between Russia and the West are rising, with the prospect of a drawn-out war and possible escalation rattling EUR investors. As a result, the Euro is struggling against Sterling, despite the Pound’s dire situation.

Pound Euro Exchange Rate Forecast: Movement to Remain Limited?

Looking ahead, a lack of data through most of the day could likely leave the Pound Euro pair to continue trading on UK domestic issues and the Russia-Ukraine crisis.

With the BoE and the Treasury seemingly content to wait and see how things unfold in UK markets, it’s unlikely we’ll have any new comments or developments from them today.

Instead, the ongoing response from analysts, economists and industry could influence Sterling. If more scathing criticism comes out, it may weigh on the Pound. However, GBP seems to have stabilised somewhat, albeit at a very weak level. Markets have priced in the Chancellor’s mini-budget, so the Pound could trade in a narrow range until there’s a fresh trading impetus.

As for the Euro, escalating tensions between Russia and the West could pressure the single currency. Following the widely decried referenda on annexing Russian-controlled territories in Ukraine, many EU leaders are calling for a new round of sanctions. Meanwhile, Moscow continues its sabre-rattling. Any bellicose rhetoric or aggressive actions from the Kremlin could adversely affect the single currency.

Samuel Birnie

Contact Samuel Birnie


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