Pound Euro (GBP/EUR) Exchange Rate Slips amid European Optimism and Fiscal Plan Miscommunication
(Updated 14:35, 4/10/22) The Pound Euro (GBP/EUR) exchange rate briefly touched a 19-day high today before Sterling’s rally fizzled out and the strengthening Euro (EUR) gained the upside.
The Pound (GBP) initially rose following last night’s news that Chancellor Kwasi Kwarteng would bring forward his debt-cutting plans. However, today Kwarteng confirmed that he would release his medium-term fiscal plan on 23 November as originally intended. The news that markets will have to wait almost two months for details on how the Treasury plans to reduce government debt has taken the wind out of Sterling’s sails.
Meanwhile, the Euro has been enjoying an upbeat mood in European markets. At the time of writing, the European STOXX 600 index is up almost 2.4% on the day. As well as cheering EUR investors, this optimism is seeing traders ditch the safe-haven US Dollar (USD), with which EUR is negatively correlated.
The upbeat mood comes following weaker-than-forecast US data yesterday, which has sparked hopes that the Federal Reserve may not raise interest rates as aggressively as anticipated. In addition, the Bank of England (BoE) intervention in bond markets last week and recent victories for the Ukrainian military are adding to the risk-on tone.
Furthermore, the Eurozone’s latest PPI figures exceeded expectations this morning. Producer prices rose by 5% month over month in August, more than the previous month’s rise of 4% and higher than market forecasts of 4.9%. This will likely feed through to the Eurozone’s CPI, with rising inflation potentially prompting more muscular action from the European Central Bank (ECB).
At the time of writing, GBP/EUR is trading at around €1.1463, down a full cent from the 19-day high of €1.1561 hit earlier in the session.
Attention now turns to a speech from ECB President Christine Lagarde at 16:00 this afternoon. If Lagarde hints at further interest rate hikes, the Euro could climb further.
Original article continues below:
Pound Euro (GBP/EUR) Exchange Rate Firms following Government U-Turn
The Pound Euro (GBP/EUR) exchange rate is wavering at a near three-week high this morning following last night’s news that Chancellor Kwasi Kwarteng will bring forward his medium-term fiscal plan and new economic forecasts. However, strength in the Euro (EUR) is capping the Pound’s (GBP) gains.
At the time of writing, GBP/EUR is trading at €1.1515, having hit resistance at a 19-day high of €1.1561.
Pound (GBP) Buoyed as Government Announcement Calms Markets
The Pound is enjoying some support today following the latest government U-turn since the Chancellor announced the controversial mini-budget.
Markets were deeply concerned after the government unveiled £105bn of unfunded spending without an independent forecast from the Office for Budget Responsibility (OBR). The fiscal event caused chaos in UK markets and saw the government come under tremendous political pressure.
Yesterday, the government caved and axed plans to scrap the top rate of income tax. Hours later, Kwarteng said that he would publish his medium-term fiscal plans – which will outline how the Chancellor will cut government debt – later this month, rather than the original date of 23 November.
The medium-term plan will hopefully provide more reassurance to markets, demonstrating how the government will fund its spending package and drive growth in the UK economy. The new plans will come alongside an updated forecast from the OBR.
UK markets have responded positively to the U-turns. Firstly, investors are relieved that the government will provide more clarity at an earlier date, thereby hopefully clearing up the significant economic uncertainty.
In addition, the U-turns signal that the government is willing to be pragmatic and at least partially abandon plans that caused turmoil last week.
Euro (EUR) Supported amid European Optimism
Meanwhile, the Euro is also up this morning, with the GBP/EUR exchange rate wavering as a result. Ukrainian advances against Russia, an upbeat European market mood, and EUR’s negative correlation to the US Dollar (USD) are all supporting the single currency.
Ukraine’s counteroffensive continues, despite Russia’s recent annexation of four Ukrainian territories. Moscow no longer has full control over these annexed areas as Ukraine’s military rapidly regains ground.
These successes seem to be adding to an optimistic mood among European investors, along with a stabilisation in bond markets.
This positive mood is reflected in markets around the world, leading to a pullback in the safe-haven US Dollar. As the Euro shares a strong negative correlation with USD, this is also buoying the single currency.
Pound Euro Exchange Rate Forecast: Sterling Recovery to Continue?
Looking ahead, there’s a lack of Eurozone and UK data throughout today’s session.
As a result, Sterling will likely continue to trade on headlines around the UK economy and the government’s fiscal plan. While the recent government U-turns have provided markets with much-needed reassurance, there are still concerns.
The UK remains in a cost-of-living crisis, while the fallout from the mini-budget continues to impact the country’s housing market. Mortgages are rising sharply, with lenders withdrawing hundreds of offers since Kwarteng’s announcement.
While the Pound’s rally looks set to continue, the currency could find its gains capped.
Meanwhile, Russia-Ukraine news could drive the Euro through most of today’s session. If Moscow responds aggressively to Kyiv’s recent gains, EUR could come under pressure.
Later on, European Central Bank (ECB) President Christine Lagarde is due to speak. If the bank chief strikes a hawkish tone, this could potentially help the single currency gain ground.