Pound Euro (GBP/EUR) Exchange Rate Drops as Liz Truss Sacks Kwasi Kwarteng
(Updated 13:40, 14/10/22) The Pound Euro (GBP/EUR) exchange rate fell sharply around lunchtime today as Kwasi Kwarteng confirmed he had been sacked as Chancellor of the Exchequer.
— Kwasi Kwarteng (@KwasiKwarteng) October 14, 2022
Although Sterling rose on the hopes that Liz Truss and Kwarteng would reverse their disastrous mini-budget, markets are now worrying about renewed political uncertainty. By sacking Kwarteng and U-turning on fiscal policy, Truss is further cratering her authority.
Many political pundits struggle to see how the PM can survive this, as the damaging mini-budget that led to Kwarteng’s sacking was as much Truss’s plan as it was the Chancellor’s.
The difficulty for the Prime Minister is that she can’t wholly blame Kwasi Kwarteng for the budget when she was repeatedly warned/asked during the leadership contest about the risk of her economic policies. Will she offer an apology / contrition at today’s press conference?
— Paul Brand (@PaulBrandITV) October 14, 2022
The government has confirmed that Jeremy Hunt is the new Chancellor. As a safe pair of hands and a centrist, Hunt may be able to help Truss mend the party’s reputation and her relationship with backbench MPs.
Hunt’s appointment may help limit the Pound’s (GBP) losses, but fears of another leadership crisis in the UK could continue to weigh on Sterling.
Original article continues below:
Pound Euro (GBP/EUR) Exchange Rate Calm amid UK Fiscal Policy Speculation
The Pound Euro (GBP/EUR) exchange rate is flat this morning, as investors keep a watchful eye on rumours of another potential mini-budget U-turn.
At the time of writing, GBP/EUR is trading at €1.1576, showing little movement from the morning’s opening rates.
Pound (GBP) Calms as Speculation Over Mini-Budget U-Turn Continues to Mount
The Pound (GBP) is seeing more sober trade this morning, following on from Thursday’s dramatic rally. This comes as investors anticipate, and price in, a further string of mini-budget U-turns from Prime Minister Liz Truss and Chancellor Kwasi Kwarteng.
Overnight, Chancellor Kwarteng flew back to the UK from Washington DC, where he was engaged in meetings with the International Monetary Fund. Echoing the 1976 Sterling crisis, this added to rumours of an imminent U-turn.
Sophie Lund-Yates, the lead equity analyst at Hargreaves Lansdown, explored the impact stating:
‘There is a sense of urgency in this move and it would seem the market is optimistic that Kwarteng’s romcom-worthy dash through the airport suggests a dramatic reconciliation between stubborn existing policy and the U-turn investors have been waiting for.’
Chancellor Kwarteng’s move came as news outlets reported that a rise in corporation tax was being considered, despite Truss’ promise to scrap the proposed hike from 19% to 25%.
Elsewhere, the Bank of England’s (BoE) emergency gilt measures are due to close this afternoon. Investors are expecting a continuation, however, and are keeping a close eye on proceedings.
Euro (EUR) Mixed amid Widening Trade Deficit
Trade in the Euro is mixed so far today as investors mull over the widening trade deficit shown in this morning’s balance of trade figures.
The figure displayed a deficit of €50.9 billion for the Eurozone, coming in far above the expected figure of €37 billion. This showed that the bloc was being heavily affected by globally rising interest rates and inflation, with the EU importing far more than it can export.
This muted any tailwinds that the EUR may have picked up from hawkish comments made by European Central Bank (ECB) policymakers, who have made further indications of high rate hikes in the coming month.
Pound Euro (GBP/EUR) Exchange Rate Forecast: Will UK Political Chaos Continue to Aid GBP?
Looking ahead, the core catalyst of movement for the Pound Euro exchange rate may continue to be UK fiscal and political uncertainty.
With the mini-budget U-turn anticipated, the Pound may firm should the changes be significant, whereas GBP may falter if Truss and Kwarteng remain steadfast.
Furthermore, next week will see the first week where the UK bond market will not be supported by the Bank of England (BoE). Should they continue to stabilise, this may buoy GBP.
For the Euro, with data releases scarce, the Ukraine-Russia conflict may continue to weigh on the single currency as it continues to deepen.