GBP/EUR Forecast: Central Banks Speeches to Rescue the Pound Exchange Rates?

September 26, 2022 - Written by John Cameron

STORY LINK GBP/EUR Forecast: Central Banks Speeches to Rescue the Pound Exchange Rates?

Sterling exchange rates slumped to fresh lows on Monday after Chancellor of the Exchequer Kwasi Kwarteng unveiled his mini-budget, decimating investors’ confidence.

After plummeting more than 5% against the US Dollar over the weekend, an all-time low, and subsequently fell dramatically against its peers. With public borrowing already at alarmingly high levels, the announcement of the unfunded tax cuts from the UK government spooked investors and Sterling immediately plummeted.

If enough damage hadn’t been done to deter investors on Friday, Kwarteng doubled down on the Tory government’s fiscal plans and announced further tax cuts were in the pipeline. Talking to the BBC on Sunday, the Chancellor emphasised Prime Minister Liz Truss’ radical plans to reshape the economy with fewer regulations and further tax cuts. Kwarteng said:

‘There’s more to come. We’ve only been here 19 days. I want to see, over the next year, people retain more of their income.’

Denying the tax cuts only helped the wealthy and dismissed the negative reaction to his plans from the market, Kwarteng is confident that the mounting debt as a proportion to GDP falling back down over time.

However, lending a modicum of support to the Pound is growing expectation of the Bank of England (BoE) could be left with no choice but to intervene and hold an emergency meeting. Money markets have already begun pricing in 175bps worth of rate hikes by November. The Financial Times predict the BoE could move quickly, before the next monetary policy meeting. They said:

‘However, the BoE’s rate-setting Monetary Policy Committee has met outside the normal cycle when markets have been turbulent in the past in a bid to restore calm, typically by cutting rates. Since it gained independence in 1997, the BoE has never raised rates between scheduled meetings.’

Euro Exchange Rates Also Fall

The Euro (EUR) softened against many of its peers on Monday in the wake of another disappointing business sentiment indicator out of Germany.

Following on from disappointing PMI data on Friday, the Euro struggled to find much support as the Ifo released sentiment in Europe’s largest economy fell to the lowest level since May 2020, the height of the pandemic. Far below market forecasts, the pessimism extended to expectations over the coming months too, as record lows in the retail sector led the readings.

However, a relatively hawkish stance from the European Central Bank (ECB) has kept a cap on any significant losses for the Euro. With an upcoming speech from ECB President Christine Lagarde later in the day, the Euro could see a much-needed boost if the central bank hints at its next monetary policy-related move. ECB Vice President Luis de Guindos, said earlier on Monday that the bank will look to incoming macroeconomic data to influence rate hikes, he added:

‘The ECB is carefully watching out for second-round effects and the bank is fully committed to 2% medium-term inflation target.’

Looking forward, the Pound Euro exchange rate could be influenced by several speeches planned for Monday. With ECB President Lagarde due to make an appearance, if she maintains the central bank’s position on committing to bringing inflation down, the Euro could see a boost.

Meanwhile, BoE Monetary Policy Committee Member Silvana Tenreyro is due to make a speech later in the session. More attention than usual will be on the central bank and if an emergency meeting will take place or not. Sterling could see a welcome boost if the BoE is set to intervene.

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TAGS: Pound Euro Forecasts