GBP/EUR exchange rate midweek update: pound undermined by UK Autumn Budget
The pound euro (GBP/EUR) exchange rate slumped in value as investors digested £40bn in tax rises that the UK Chancellor Rachel Reeve insisted are needed to plug a £22bn "black hole" in the nation's finances.
(28/10/2024 to 30/10/2024)
Monday
The pound euro (GBP/EUR) exchange rate wavered between the 1.19 and 1.20 levels as investors geared up for Labour’s highly anticipated UK Autumn Budget on Wednesday.
The choppy trading conditions were prompted by ongoing concerns about potential tax increases and spending cuts, which were offset by recent expectations of increased investment.
An improving market mood provided the increasingly risk-sensitive pound with a modicum of support, helping to mitigate potential losses.
Meanwhile, the euro was lifted slightly by its negative correlation with a weakening dollar.
Tuesday
The pound jumped into the 1.20 mid-range versus the euro on the back of a diverging Eurozone and UK monetary policy outlook, with rates expected to fall at a slower pace in the UK than the bloc.
The German GfK Consumer Confidence Indicator reported that morale in the Eurozone’s largest economy increased from -21.0 for October to -18.3 for November – its highest level since April 2022. Despite the gains and subsequent reduction in ECB rate-cut expectations, persistent recession concerns subdued the euro.
Wednesday
The pound euro exchange rate slumped to around 1.197 following the publication of the UK’s Autumn Budget. Chancellor Rachel Reeves announced a raft of expected tax rises totalling £40bn. However, the UK currency’s losses were cushioned by an increase to UK borrowing which could stoke inflation and in turn make the BoE think twice about further interest rate cuts.
Meanwhile, the euro was bolstered by upbeat macroeconomic data. Germany’s yearly inflation index for October came in warmer than expected, posting its highest level in three months. This followed GDP prints showing the Eurozone economy grew twice as fast as expected between July and September, while Germany outperformed expectations with quarterly growth of 0.2%.
Economists had expected the bloc’s largest economy to shrink 0.2%, but the report revealed domestic demand had increased faster than anticipated, helping it to avoid recession.
Looking ahead
The Eurozone’s latest CPI hits the headlines on Thursday, with headline inflation forecast to cool while core inflation is expected to warm – a mixed set of readings that could see the euro waver.
Meanwhile, a data lull in the UK will leave the pound exposed to the Budget.