- Pound (GBP) falls steeply after the min-budget
- UK economic outlook deteriorates
- Euro (EUR) rises, adding to last week’s gains
- German IFO business sentiment data due
The Pound Euro (GBP/EUR) exchange rate is falling, extending last week’s selloff. The pair lost 1.8% last week, its fourth straight week of losses, settling on Friday at €1.1185 after trading in a range between €1.1185 – €1.1496 across the week. At 05:45 UTC, GBP/EUR trades -2.15% at €1.10948.
The pound tanked lower on Friday following the Chancellor of the Exchequer, Kwasi Kwarteng’s mini-budget. The pound tumbled to a fresh 37-year low against the dollar and fell to an 18-month low against the euro as investors reacted to the biggest tax cuts in 50 years in an attempt to boost growth to 2.5%.
The government announced the scrapping of the top rate of tax at 45%, ditched the rise in National Insurance previously announced by Rishi Sunak, and dumped the planned rise in corporation tax next year, in addition to the pre-announced energy relief package. All in all, these are massive unfunded measures that have unnerved the markets. The cost of borrowing for the government rose by almost record amounts as investors and economists attempted to do the sums over the new strategy.
According to economists, interest rates could now rise to 5.2% by this time next year, with expectations climbing that rates will rise 1% in the meeting in November.
The strong market reaction was concerning and suggests that investors are losing confidence in the UK.
There is no high impacting UK economic data due to be released today. Instead, BoE’s Silvana Tenreyo is due to speak and could shed some light on what policymakers are thinking after the Chancellor’s speech.
The euro rose versus the pound last week but fell versus the US dollar amid rising concerns over the health of the eurozone economy. The eurozone composite PMI, which is considered a good gauge for business activity, fell to 48.2 in September, down from 48.9. A level below 50 indicates contraction.
Today attention will shift to the German IFO business sentiment data, which is expected to fall to 87.1, down from 88.5 in August. A weak figure could drag on the euro.