Pound Wavers as UK Chancellor Sacked
GBP/EUR: Up from €1.140 to €1.149
Although the Pound Euro (GBP/EUR) exchange rate firmed over the past week, Sterling faced several headwinds and surrendered the majority of its gains. Commentary from the Bank of England (BoE) weighed upon GBP; subsequently, UK political volatility sapped investors’ confidence.
Initially, the bringing forward of the publication date for the Chancellor’s medium-term fiscal plan and independent economic forecasts boosted Sterling. However, GBP sank on Tuesday as the BoE announced it would not extend its bond-buying intervention past Friday.
Midweek, the Pound regained some strength as markets speculated that the UK’s central bank may extend its intervention after all. Gains came despite an unexpected contraction in the UK’s economy in August.
On Thursday, Sterling was bolstered once again, as rumours circulated that Prime Minister Liz Truss may be planning to retract tax cut plans. At the end of the week, however, a shock firing of UK Chancellor Kwasi Kwarteng triggered a loss of faith in the Tory government, denting GBP.
Into next week, UK inflation data will be released and is expected to show a rise in the year to September. Such a result may prompt further rate hike action from the BoE, boosting the Pound.
Euro (EUR) Falls on Risk Aversion, Escalation of Ukraine War
EUR/GBP: Down from £0.877 to £0.869
The Euro came under pressure last week as risk aversion surged amid renewed threats from Russia. A loss of power at the Zaporizhzhia nuclear power plant in Ukraine sparked fear amongst atomic energy experts.
On Monday, an explosion on the Kerch Bridge, which links Russia with Crimea, triggered a wave of risk-off trading. Russia blamed Ukraine for the attack and redoubled its missile strikes on the country.
A pullback in the ’Greenback’ lent some support to the single currency on Tuesday, given the strong negative correlation between the currencies, but Russia’s fresh attacks on Ukrainian territory capped gains.
On Wednesday, industrial production in the Euro area rose by more than expected, but fears surrounding the safety of the Zaporizhzhia nuclear power plant in Ukraine extended risk-off pressure.
The head of the International Atomic Energy Agency said: ‘This repeated loss of the ZNPP’s off-site power is a deeply worrying development and it underlines the urgent need for a nuclear safety and security protection zone.’
Toward the end of the week, the UN voted to condemn Russia’s annexation of Ukrainian territory, buoying EUR somewhat but failing to fully recover earlier losses.
This coming Tuesday, a fall in Germany’s ZEW economic sentiment index may weaken the Euro further, alongside the prospect of further conflict in Ukraine.