The Pound Euro exchange rate raced higher this week. The pairing striking its best levels since early September amid reports the government could U-turn on plans for major tax cuts.
Pound soars amid hopes UK mini-budget may be scrapped
The Pound found modest gains at the start of this week after Chancellor Kwasi Kwarteng announced he would be bringing forward his medium-term fiscal plan to 31 October.
But Sterling was unable to sustain these gains for long. A speech by Bank of England (BoE) Andrew Bailey caused GBP exchange rates to crash on Tuesday after he confirmed the bank’s emergency bond purchases would end this week.
GBP exchange rates then quickly bounced back again in mid-week trade amid suggestions the BoE was actually in private talks with some banks to continue its bond buying programme in a limited capacity.
However, the bulk of the Pound’s gains were focused at the end of the week as GBP investors seized on rumours another U-turn from the UK government could see it scrap more parts of Kwarteng’s mini-budget.
Meanwhile the Euro faced pressure throughout the week amid concerns that the conflict in Ukraine could escalate, and place even more pressure on the Eurozone economy.
The single currency was also undermined as a result of its negative correlation with the US Dollar, after the latter spiked on the back of stronger-than-expected US inflation figures.
Ongoing fiscal uncertainty to extend Sterling volatility?
Looking ahead, its likely UK fiscal and political uncertainty will continue to infuse volatility into the GBP/EUR exchange rate.
In terms of data the highlight next week is likely to be on the UK’s consumer price index, with September’s release forecast to report domestic inflation accelerated back into double digits.
While another rise in inflation is likely to stoke cost of living concerns, it will also place more pressure on the BoE to deliver a hefty interest rate hike next month. Will the prospect of a bumper rate hike be enough to offset the cost of living concerns however?
For EUR investors the focus is likely to be on the latest ZEW surveys from Germany. Expect to see the Euro struggle in the first half of the week if economic sentiment in the Eurozone’s largest economy is reported to have deteriorated again this month.
At the same time EUR sentiment is likely to remain highly sensitive to Ukraine developments, with the single currency poised to weaken if the conflict shows signs of escalating further.
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