- Pound (GBP) rises after losses yesterday
- The market has lowered BoE rate cut expectations
- Euro (EUR) is falling after gains yesterday
- Eurozone inflation rose to 2%
The Pound Euro (GBP/EUR) exchange rate is rising modestly after losses yesterday. The pair fell 0.76% in the previous session, settling on Wednesday at €1.1939 and trading in a range between €1.1934 and €1.2033. At 11:00 UTC, GBP/EUR trades 0.03% at €1.1943.
The pound is edging higher after yesterday’s losses as the dust settles on Labour’s first Budget in 15 years.
The budget saw the Labour government raise £40 billion in taxes, the second largest fiscal tightening in history. Capital gains, inheritance, and employer National Insurance contributions were increased. The minimum wage was also increased, raising labor costs.
Substantial increases in spending and government borrowing also resulted in some volatility in the gilt market, sending the pound lower yesterday.
Today, the market is rising after the Office for Budget Responsibility said the Budget would bring a period of increased borrowing and inflation.
Following the budget, the market has lowered Bank of England rate cut expectations and now sees just one 25 basis point rate cut this year, down from 2.
Meanwhile the euro is rising after eurozone inflation came in hotter than expected. Inflation rose by 2% year on year, up from 1.7% in September. The data comes after inflation in Germany and in Spain was also hotter than expected. Although inflation remains at the ECB’s 2% target level,
The market is pricing in a 90% probability that the ECB will reduce interest rates by 25 basis points in the December meeting.
The market had been fully pricing in this cut before yesterday. However, stronger-than-expected GDP data saw investors rein in rate cut expectations slightly. Eurozone GDP rose 0.4% quarter on quarter in Q3, up from 0.2% previously, and double the growth forecast. Meanwhile, Germany avoided a recession, unexpectedly growing in Q3.