- Pound (GBP) falls for a third day
- Chancellor Rachel Reeves could cut welfare spending
- Euro (EUR) jumps to a monthly high after German announcement
- Germany plans to reform its fiscal brake to boost defence spending
The Pound Euro (GBP/EUR) exchange is falling for a third straight day. The pair fell 0.56% in the previous session, settling on Tuesday at €1.2038. It traded in a range between €1.2037 and €1.2123. At 14:30 UTC, GBP/EUR is trading -0.77% at €1.1945.
The EUR is surging across the board, pushing GB/EUR to a monthly low after the likely to be Chancellor Friedrich Merz, along with other political leaders, announced a historic shift to its fiscal policy. The leaders announced plans to reform Germany’s debt brake in a fiscal U-turn that could be a game changer for the country. This reform specifically allows for higher defence spending. They also announced a €500 billion special fund for infrastructure.
Following the announcement, which is expected to be inflationary, bund yields surged. German bonds are on course for their worst day since the months following the fall of the Berlin Wall. The yield on the 10-year bund jumped 25 basis points following the fiscal overhaul.
Attention is now being directed to the ECB rate decision for tomorrow. The central bank is widely expected to cut rates by 25 basis points. However, given the cut is expected, the market will be more interested in what comes next.
The pound is falling against the EUR but rising against the USD amid a selloff in UK bond, although by far less than in Germany.
Separately reports are swirling that UK Chancellor Rachel Reeves is planning several billion pounds worth of cuts to welfare spending after her financial headroom was wiped out. Economic headwinds following the Autumn budget mean that Reeves needs to find more money to meet her fiscal rules. Her Spring Statement is due on March 26.
On the data front, figures showed that service sector firms cut employees at the fastest pace since 2020, ahead of tax and minimum wage increases coming into effect in April.
The services PMI rose to 51 in February, up from 50.8 in January.