The pound euro exchange rate plunged from a near 30-month high to a six-week low this week, as strong Eurozone data and the UK’s Autumn Budget hammered the currency pairing.
Pound plunges following UK Autumn Budget
After a quiet start to the week, the pound euro exchange rate then moved higher on Tuesday, almost reaching a 30-month high hit in the middle of October. The upside came amid optimism ahead of the UK’s Autumn Budget.
However, GBP/EUR soon came crashing down. Strong Eurozone GDP data boosted the euro midweek, with growth in the bloc unexpectedly accelerating from 0.2% to 0.4% in the third quarter and Germany sidestepping recession.
The common currency leapt even higher on Thursday thanks to a hotter-than-forecast consumer price index. With Eurozone inflation ticking up from 1.7% to 2% and the economy faring better than expected, markets scaled back bets on European Central Bank (ECB) interest rate cuts.
Meanwhile, Sterling initially fluctuated as Chancellor Rachel Reeves unveiled £40bn in tax hikes, higher spending, and a notable jump in borrowing in her inaugural Autumn Budget.
Once markets had time to digest the budget, the pound began to tumble. UK gilts suffered a selloff and GBP plunged as anxiety over higher borrowing rattled UK investors.
After striking a six-week low on Thursday, GBP/EUR managed to claw back some losses on Friday. The post-budget volatility settled somewhat, and bets on a slower pace of rate cuts from the Bank of England (BoE) put a floor under the pound.
BoE policy decision to boost the pound?
Looking ahead to next week, the Bank of England decision is in the spotlight.
As a 25bps interest rate cut is already priced in, markets will likely focus on the bank’s forward guidance. Any indication that rates may stay higher for longer following the budget could boost the pound, although fresh anxiety over borrowing costs could cap GBP’s upside.
New German data could impact EUR throughout the week, with the latest factory orders, balance of trade and industrial production reports out. With German GDP having beaten forecasts for the third quarter, could more positive data underpin the euro?
The Eurozone’s retail sales data from September could also drive movement in the common currency. Steady sales growth may lend EUR support.
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