Pound Euro (GBP/EUR) Drops as UK Political Uncertainty Returns
The Pound Euro (GBP/EUR) exchange rate is struggling to find a clear direction today as the UK faces another credit rating downgrade.
At time of writing, the GBP/EUR exchange rate is around $1.1420, a 0.31% jump from this morning’s opening levels.
Pound (GBP) Subdued amid Renewed Government Chaos
The Pound (GBP) struggled for demand today as a myriad of headwinds threaten to drag Sterling down.
Credit rating agency Fitch has joined S&P and lowered their credit rating outlook for the UK. In wake of the mini-budget market meltdown, Fitch has downgraded the UK from ‘stable’ to ‘negative’. Fitch said:
‘The large and unfunded fiscal package announced as part of the new government’s growth plan could lead to a significant increase in fiscal deficits over the medium term.’
With Chancellor Kwasi Kwarteng announcing £45bn worth of unfunded tax cuts, the financial markets fell dramatically over escalating debt fears. Despite the reversal of the top 45p tax rate slash, the credibility of the UK government’s fiscal strategy is tarnished. With another drop in investor confidence, the Pound could slide.
Meanwhile, Kwarteng is set to hold crisis talks with high street bank bosses over the mortgage crisis. Another undesirable impact the mini-budget has was the biggest increase in mortgage costs in 14 years. The average rate on a new two-year fixed rate now rising above 6%.
Further piling the pressure on the Pound is the announcement of nurses to vote in first ever strike ballot. In protest of the government’s proposed 5% pay rise, the Royal College of Nursing (RCN) is balloting 300,000 members for the first time in its 106-year history.
Euro (EUR) Firms Despite Downbeat PMI Data
Meanwhile, the Euro (EUR) is enjoying mixed success today amid troubling PMI data.
Germany, Europe’s largest economy, saw a sixth month of contraction in the construction sector. The PMI reading fell to 41.8, one of the worst performances in the last 10 years. Contractions across the board in the Eurozone construction sector shows inflationary pressures at their highest. Outlook going forward is also the most downbeat since the Covid outbreak.
Escalating tensions in Ukraine are continuing to weigh down the Euro. European leaders are set to meet in Prague later today to discuss Russia’s international isolation over the protracted invasion. With 44 nations attending, Josep Borrell, European Union’s foreign policy chief, is hoping a clear message will be sent to Russia. Borrell added that the meeting will be looking for a new order without Russia.
Pound Euro Exchange Rate Forecast: Hawkish ECB to Bolster the Euro?
Looking ahead, the Pound Euro exchange rate could see further movement with the release of the European Central Bank (ECB) Policy Meeting minutes. A continued hawkish rhetoric could bolster expectations for future rate hikes.
Meanwhile, a lack of major data for the rest of the week, the Pound could be left exposed to domestic woes. Further political turmoil is likely to weigh on investor confidence.