Pound Euro (GBP/EUR) Exchange Rate Skyrockets amid Reports of More Mini-Budget U-Turns
(Updated 13:30, 13/10/22) The Pound Euro (GBP/EUR) exchange rate surged higher today, rocketing to a one-month high, amid reports that the government may scrap more measures from its calamitous mini-budget. At the time of writing, GBP/EUR is trading at €1.1559, up 1.3% from this morning’s low of €1.1411.
According to Sky News, ministers at the top levels of Liz Truss’s government are ‘actively’ discussing scrapping further tax cuts from the mini-budget, which sent UK markets into meltdown last month. Pundits are speculating that this could result in a change or delay to planned cuts in dividend tax or corporation tax.
A former cabinet minister tells me: “Brace for the mother of all U-Turns on the mini budget today. A friendly person in the know is advising us to steer clear of the media today to avoid the explosion. We wouldn’t want to look silly by tomorrow.” #waitandsee
— Nicholas Watt (@nicholaswatt) October 13, 2022
While so far the news is only hearsay, Pound Sterling (GBP) has skyrocketed. In addition, UK government bonds have rallied, with the ten-year gilt yield easing by 0.27%.
The rumours come as Chancellor Kwasi Kwarteng and Bank of England (BoE) Governor meet with Kristalina Georgieva, the head of the International Monetary Fund (IMF). Both the IMF and the BoE have been critical of Kwarteng’s fiscal plans.
Looking ahead, this news could remain the focus for GBP investors. If the government confirms the reports and pulls another policy U-turn, the Pound Euro exchange rate could continue to climb. However, if Truss and Kwarteng stick to their plans – as they have said they will – Sterling could plunge.
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Pound Euro (GBP/EUR) Exchange Rate Calm ahead of US Inflation
The Pound Euro (GBP/EUR) exchange rate is trading sideways today, having trimmed yesterday’s gains a little overnight, as markets brace for the latest US inflation figures.
At the time of writing, GBP/EUR is trading at around €1.1429, having wobbled in a narrow range.
Pound (GBP) Underpinned by BoE Speculation
The Pound (GBP) is muted this morning amid a lull in trading activity ahead of the US inflation rate reading for September, which could have a significant impact on global markets.
GBP traders also lack impetus following this week’s recent volatility. Sterling slumped on Tuesday evening as Bank of England (BoE) Governor Andrew Bailey said the bank would not extend its emergency bond-buying operation beyond Friday. But GBP then recouped its losses amid speculation that the BoE may extend after all.
Today, some commentators have given their thoughts on the situation. Economist Mohamed El-Erian – President of Queen’s College, Cambridge University – believes the bank may have no other option but to continue its intervention beyond the planned deadline.
Speaking to BBC Radio 4’s Today programme, El-Erian said:
‘A lot of people and I would agree that when push comes to shove, the Bank of England is likely to continue providing liquidity support. A central bank is like a doctor. If the patent is really ill and even if the patient has misbehaved it is very difficult for a doctor to walk away. So the reality of central bank emergency interventions is that they tend to continue for longer than what is expected and central banks simply will not walk away.’
This opinion seems to be shared by investors, as GBP/EUR surged higher yesterday despite an unexpected contraction in UK GDP. Today, it seems to be underpinning the Pound, preventing deep losses despite ongoing concerns about the UK economy.
Euro (EUR) Muted amid Lack of Data
Meanwhile, the Euro (EUR) is also somewhat subdued today amid a lack of notable Eurozone data releases.
Instead, EUR traders seem focused on headlines out of Ukraine. Russia has ramped up its attacks on Ukrainian cities this week – often killing civilians – following an explosion on Russia’s Kerch Bridge to Crimea over the weekend.
While this escalation in the conflict has weighed on the single currency, there are some small rays of hope. The Ukrainian military continues to make progress in pushing back the invading forces.
Additionally, last night the UN voted 143 to 5 to declare Russia’s annexation of Ukrainian territories as illegal. The remaining 45 member states either abstained or did not vote. The resolution highlights Russia’s increasingly isolated position on the world stage.
Furthermore, Vladimir Putin will meet with Turkish President Recep Tayyip Erdoğan today. Reports suggest that Erdoğan will propose ideas to achieve peace. Although the talks are unlikely to lead to significant progress, they signal a willingness for diplomacy from the Kremlin.
However, heavy fighting continues and the war looks set to drag on for some time. Therefore, these developments are having a limited impact on EUR.
Pound Euro Exchange Rate Forecast: US CPI to Trigger Volatility?
As today’s session unfolds, the UK’s financial situation will likely remain the focus for GBP investors. Amid ongoing uncertainty about the BoE’s bond-buying intervention, Sterling could face some volatility. Any new information about the bank’s plans could cause significant movement.
Meanwhile, Russia-Ukraine news may continue to impact EUR exchange rates. If the conflict continues to escalate, the single currency could come under pressure. Traders will also be interested in the outcome of the meeting between Putin and Erdoğan .
Later on, the US inflation rate reading could rock the Pound Euro pair. As the Euro is negatively correlated to the US Dollar (USD), rising inflation in the US could weigh on EUR. However, with the UK bond markets still in turmoil, prospects of more aggressive interest rate rises from the Federal Reserve could hit GBP hard. Either way, US inflation could disrupt the current calm in GBP/EUR.