- Pound (GBP) is falling and falls across the week
- Tax hikes look increasingly likely
- Euro (EUR) is rising despite weak data
- Eurozone PPI and German factory orders miss forecasts
The Pound-Euro (GBP/EUR) exchange rate is falling after gains yesterday. The pair rose 0.48% in the previous session, settling on Thursday at €1.1612. It traded between €1.1553 and €1.1637. At 15:30, GBP/EUR trades -0.09% at €1.1602. The pair is on track to fall 0.87% across the week.
The pound is falling on Friday and has underperformed its peers this week with political questions very much in focus. Prime Minister Starmer’s Labour Party rebelled against the welfare reforms, forcing him to remove a key part of the plan and raising questions about the government’s ability to cut spending.
As a result of events this week, Chancellor Rachel Reeves will likely be forced to raise 10s of billions of pounds in taxes this year as the government’s plan to grow the economy fails to deliver.
Rachel Reeves raised £40 billion in taxes in her first budget, the biggest tax increase in three decades. While Reeves said at the time this was a one-off event, the limited headroom that she now has suggests that she may need to hike taxes again in October.
Tax increases slow the economy and are considered deflationary. As a result, the pound is falling.
The euro is rising despite weak data from the region.
German factory orders Fell by more than forecast in May as a sharp drop in domestic demand offset a rise in orders from non-Euro area economies. Factory orders dropped 1.4% more than the nought .2%, following an upwardly revised 1.6% increase in April. Delving deeper into the numbers, all orders rose 2.9% while domestic orders plunged 7.8%.
Separately, eurozone factory gate inflation, as measured by PPI, was also weaker than expected, falling 0.6% month-on-month, a larger drop than the 0.5% decline forecast. However, this was significantly down from the 2.2% fall seen in the previous month. The main drag was actually energy prices, which declined 2.1% on the month, and if you strip that out, euro area prices were actually up in May.
The data comes as consumer price inflation is at the ECB’s 2% target level.
