Trade in the Pound Euro exchange rate was extremely erratic this week, amid the fallout from the unveiling of UK Chancellor Kwasi Kwarteng’s mini-budget the previous week.
Pound rocked by UK fiscal policy concerns
The Pound Euro exchange rate plunged to a new two-year low at the start of this week as concerns over Kwarteng’s tax cut plans triggered a Sterling crisis.
GBP exchange rates quickly bounced back amid speculation the Bank of England (BoE) could intervene with an emergency interest rate hike.
While the BoE ultimately did not deliver an emergency hike, it did intervene in the UK bond market, with its bond purchases helping to cap the selloff of government bonds and lift Sterling after a mid-week bruising in response to the IMF’s criticism of the budget.
This recovery was then supported by some hawkish comments from BoE Chief Economist Huw Pill as he suggested the government’s fiscal policies would result in a ‘significant and necessary monetary policy response’.
Meanwhile, the Euro was bolstered at the start of the week by some hawkish comments from European Central Bank (ECB) policymakers, including President Christine Lagarde. Lagarde and her colleagues dropped several hints that the bank will maintain its current pace of monetary tightening for the short-medium term, buoying EUR sentiment.
The single currency then faced some pressure in the middle of the week after the discovery of several leaks in the Nord Stream pipeline, which were attributed to deliberate sabotage.
Closing out the week was the publication of the Eurozone’s consumer price index. September’s preliminary figures reported inflation in the bloc spiked to a new record high. Further bolstering ECB rate hike expectations and underpinning the Euro.
More Sterling Volatility Ahead?
Looking ahead, with the UK governments committed to its plans for sweeping unfunded tax cuts, trade in the Pound may remain highly volatile in the near-term.
However, if the government offers more insight in its spending and borrowing plans, this could potentially offer some relief to Sterling.
Meanwhile the primary data focus for EUR investors next week is likely to be the release of Germany’s latest industrial releases. Where another contraction is factory orders last month could drag on the Euro.
Otherwise, the single currency is likely to remain sensitive to developments in Ukraine. Any sign that the conflict is escalating could weaken EUR exchange rates.
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