Pound Euro (GBP/EUR) Exchange Rate Rebounds as BoE Expands Gilt Programme
(Updated 15:45, 11/10/22) The Pound Euro (GBP/EUR) exchange rate recovered from its slip this morning as the Bank of England (BoE) expanded measures to stabilise UK bond markets.
This morning, the BoE announced plans to broaden its bond-buying scheme to included index-linked gilts, which are tied to inflation, while warning of ‘a material risk to UK financial stability’.
After an initial dip, the Pound (GBP) was able to recoup its losses. The expansion of the BoE’s emergency measures seems to have worked, at least temporarily.
Meanwhile, the Euro (EUR) has also struggled for a clear direction today amid a lack of Eurozone data. EUR’s negative correlation to the US Dollar (USD) has caused some mixed movement, as a shifting risk appetite saw the safe-haven American currency waver.
At the time of writing, the Pound Euro pair is trading at €1.1401, over 0.1% higher than it was at the start of today’s European session but below overnight highs.
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Pound Euro (GBP/EUR) Exchange Rate Volatile amid Bond Market Fears
The Pound Euro (GBP/EUR) exchange rate fluctuated this morning, heading lower overall, as the Bank of England (BoE) scaled up its bond market intervention.
At the time of writing, GBP/EUR is trading at €1.1389, down around 0.15% from its overnight highs.
Pound (GBP) Wavers as BoE Widens Bond-Buying Scheme
The Pound (GBP) initially slipped this morning as markets were once again concerned about the UK’s financial stability.
The BoE decided to widen its emergency bond-buying programme to include index-linked gilts, which are linked to inflation.
As it announced the move, the bank said there has been a ‘further significant repricing of UK government debt’ in recent days. It warned:
‘Dysfunction in this market, and the prospect of self-reinforcing ‘fire sale’ dynamics pose a material risk to UK financial stability.’
This morning, in line with its financial stability objective, the Bank has announced that it will widen its gilt purchase operations to include index-linked gilts.https://t.co/6gHVb569Hp
— Bank of England (@bankofengland) October 11, 2022
Concerns about soaring gilts yields, and the threat to financial markets, pushed Sterling lower this morning. The BoE’s intervention saw the Pound recoup these losses, only to dip back down again as government bond yields rose once again.
Other factors are also hurting GBP. A report today from the Institute for Fiscal Studies (IFS) states that there is a £62bn gap in the government’s mini-budget that will need to be filled either by tax rises or spending cuts. As Liz Truss is fervently in favour of cutting taxes, there are concerns that public services will face a further squeeze on budgets.
Euro (EUR) Capped by Russia-Ukraine Concerns
Meanwhile, the Euro (EUR) is finding its upside against the Pound limited amid the escalating conflict in Ukraine.
Analysts fear that the Russia-Ukraine war could be entering a new phase following the attack on the Kerch Bridge, which links mainland Russia with the Crimean peninsula, over the weekend.
Yesterday, Russia launched a deadly barrage of missiles at key Ukrainian cities, killing and injuring dozens of civilians. The attacks have continued into today.
Furthermore, Belarus – which borders Ukraine from the north – has vowed to cooperate more closely with Russia, allowing Russia to post soldiers in the country and announcing joint military deployments. This could lead to renewed fighting in northern Ukraine, or even see Belarusian fighters enter the conflict.
These fears are exerting some pressure on EUR, limiting its gains against GBP.
Pound Euro Exchange Rate Forecast: Central Bank Speakers in Focus
Looking ahead, a number of central bank speakers could influence the Pound Euro pair. Policymakers from both the Bank of England and the European Central Bank (ECB) are due to speak, including BoE Governor Andrew Bailey. Any hints about upcoming policy decisions could prompt some movement, with hawkish signals supporting the relative currency.
GBP investors will also be particularly keen to hear Bailey’s take on the current financial instability in UK markets. If he can provide reassurance that the British central bank has the crisis in hand then Sterling may rise. However, if Bailey sounds concerned then the Pound could falter.
Until then, movements in the UK bond market could continue affecting GBP/EUR.
Likewise, news from Russia-Ukraine could impact the pair. If the situation continues to deteriorate then this may see Sterling claw back earlier losses.