Pound Euro exchange rate highly volatile amid UK political drama

The Pound Euro exchange rate traded in a wide range again this week, with UK political developments infusing volatility into the pairing. 

Pound rocked by UK political turmoil 

It’s been another eventful session for the Pound this week, as a dramatic few days in UK politics culminated in the resignation of Prime Minister Liz Truss. 

Before this however, Sterling got off to a flying start this week, with GBP/EUR climbing to a two-month high after Chancellor Jeremy Hunt announced he would be scrapping almost all of this predecessor’s mini-budget. 

However, the Pound wasn’t able to hold on to these gains for long, as questions over the future of Liz Truss’s premiership began to sap Sterling sentiment 

After coming under additional pressure in mid-week trade after a hotter-than-expected UK inflation print. GBP/EUR then strengthened following Truss’s resignation announcement, although the prospect of another leadership election capped Sterling’s gains. 

A larger-than-expected contraction in UK retail sales also weighed on GBP sentiment at the end of the week.

Meanwhile, the Euro faced pressure through the first half of this week amid ongoing concerns over the war in Ukraine. EUR investors were particularly worried that Vladimir Putin’s imposing of martial law in occupied territories could mark another escalation of the conflict. 

The single currency then fared better in the latter half of the week as its negative correlation with the US Dollar saw it strengthen as the latter faltered. 

Tory leadership race to inject fresh volatility into Sterling? 

Turning to next week’s session, it seems safe to assume that UK political developments will continue to act as the main catalyst of movement for the GBP/EUR exchange rate. 

The start of the next Conservative leadership election next week will surely stoke volatility in the Pound, particularly given the blistering pace that everything is moving. 

Also influencing GBP exchange rates will be the UK’s latest PMI releases. If October’s preliminary figures report a contraction in the UK’s private sector, GBP exchange rates could weaken at the start of the week  

At any other time, we would expect the European Central Bank’s (ECB) impending interest rate decision to be the main focus next week. While another 75bps hike from the bank is largely priced in, the Euro could still rally on the back of some hawkish forward guidance.  

In the meantime, the publication of the Eurozone’s own PMIs could exert some pressure on EUR exchange rates at the start of the week. Economists predict private sector growth in the bloc to have continued to decline this month. 

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